Income Tax Act 2007 section 809FZR

Direct lending funds: exception

Section 809FZR provides an exception for certain direct lending funds from the automatic income treatment of carried interest under section 809FZQ, allowing the general carried interest rules to apply instead, subject to specific conditions about the nature of the fund and its loans.

• Carried interest from a direct lending fund structured as a limited partnership is exempt from the direct lending fund income treatment rule, provided at least 75% of the fund's loans (by value) are qualifying loans and the carried interest meets certain disposal conditions
• A qualifying loan must be an arm's length commercial loan to an unconnected borrower, with fixed repayments, fixed maturity, an intention to hold to maturity, and a relevant term of at least four years
• Where a qualifying loan is repaid early (before 40 months) for genuine commercial reasons unrelated to the carried interest rules, it is treated as having been held for 40 months when calculating the scheme's average holding period
• Where this exception applies, the general carried interest rules apply instead, but with a modified hurdle rate of 4% rather than the standard 6%