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1 Is Entity X a resident of Australia under subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

1 Yes. Question 2 Is Entity X an 'Australian Entity' within the meaning of the third party debt conditions in paragraph 820-427A(3)(e) of the Income Tax Assessment Act 1997 (ITAA 1997)? Answer 2 Yes. Question 3 Will the funds held in Entity X's overseas bank accounts be considered to be 'minor or insignificant assets' for the purposes of paragraph 820-427A(3)(c) of the ITAA 1997 for the period XX XXX 20XX to XX XXX 20XX? Answer 3 Yes. This ruling applies for the following period: 1 July 20XX to 30 June 20XX The scheme commenced on: 1 July 20XX

Entity X Entity X is a private limited company incorporated in Country X. Entity X is a wholly owned subsidiary of Entity Y, a company incorporated in Country Y. Entity X's principal place of business is in Australia. Entity X's sole business activity since it was incorporated is that of property investment holding. Initially Entity X's directors were non-residents with the majority of the directors residing outside Australia and with only one director residing in Australia. Currently, all but one of the directors are Australian residents and all decisions have been made in formal board meetings held in Australia and subsequently reflected in board minutes. Day to day decision making and operational decisions are made under delegated authority (granted by the Board of Directors) by Entity X's investment manager in Australia. High level strategic decisions and significant issues are decided by the Board of Directors at regular board meetings (held in Australia). These decisions set Entity X's general polices and determine the direction of its operations and the type of transactions it will enter.

Board meeting minutes outline the decisions made, issues considered, and approvals provided by the Board of Directors which include: •                     whether to declare dividends •                     deciding to issue new shares •                     whether Entity X's profit and loss is meeting expectations •                     whether Entity X will be able to pay its debts as and when they fall due and payable •                     questioning investment manager on several issues regarding financial performance •                     considering capital expenditure process approval, budget and policy regarding delegation of approval •                     considering and approving significant capital expenditure •                     debt to equity conversion •                     source of funding •                     considering and resolving the company's asset plans and company strategy •                     approving the policy for delegated authority •                     resolving to amend financing agreement Decisions are made by all the directors and no director has special powers to make decisions.

All board meetings were held in Australia and overseas directors were provided with a Zoom link to dial in. At least half of the Directors were physically present at Directors meetings held in Australia. Entity X's finance manager also attended all the Directors meetings in person in Australia. Financing The majority of the funding for Entity X's operations has been by way of third party debt with Entity A. Entity A has a general security interest over all the assets held by Entity X. This is registered in both Australia and Country X. It is noted that all the assets of Entity X are in Australia or related to the Australian operations apart from X bank accounts in Country X. At no time during the relevant period did the combined balance of the overseas accounts exceed $XX. Entity X advised that the existing debt facility with Entity A has been renewed and the terms changed to specifically state that the security is limited only to Australian assets.

Income Tax Assessment Act 1936 Subsection 6(1) Income Tax Assessment Act 1997 Subsection 820-427A(3)

Question 1 Is Entity X a resident of Australia under subsection 6(1) of the ITAA 1936? Summary Entity X is a resident of Australia under subsection 6(1) of the ITAA 1936. Detailed reasoning Subsection 6(1) of the ITAA 1936 defines when individuals and companies will be treated as Australian residents for Australian tax purposes as follows: "resident" or resident of Australia means: (a) a person, other than a company, who resides in Australia and includes a person: (i) whose domicile is in Australia, unless the Commissioner is satisfied that the person's permanent place of abode is outside Australia; (ii) who has actually been in Australia, continuously or intermittently, during more than one-half of the year of income, unless the Commissioner is satisfied that the person's usual place of abode is outside Australia and that the person does not intend to take up residence in Australia; or (iii) who is: (A) a member of the superannuation scheme established by deed under the Superannuation Act 1990 ; or (B) an eligible employee for the purposes of the Superannuation Act 1976 ; or (C) the spouse, or a child under 16, of a person covered by sub-subparagraph (A) or (B); and

(b) a company which is incorporated in Australia, or which, not being incorporated in Australia, carries on business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia. The definition sets the criteria necessary to establish residency of a company. The first element of the definition states that a company which is incorporated in Australia, is a resident of Australia (the incorporation test). If a company is not incorporated in Australia, a company will be a resident under 'the central management and control (CM&C) test' of company residency in paragraph (b) if it carries on business in Australia and has its CM&C in Australia. Alternatively, a company which is not incorporated in Australia will be a resident under 'the voting power test' if it carries on business in Australia and has its voting power controlled by shareholders who are residents of Australia. Incorporation Test and the Voting Power Test

Entity X was incorporated in Country X. Therefore, it is not incorporated in Australia and is not a resident company under the incorporation test within subsection 6(1) of the ITAA 1936. Entity X's sole shareholder is not a resident of Australia. Therefore, Entity X is also not a resident of Australian under the voting power test. As Entity X is not incorporated in Australia and its voting power is held by shareholders that are not Australian residents, the CM&C test is relevant to determining whether it is a resident of Australia. CM&C Test The High Court's decision in Bywater Investments Ltd 2016 ATC 20-589 (Bywater) confirmed the principle that the place of a company's central management and control is determined by the reality of what happens, not by reference to legal formalities, or restrictions on who may exercise it or where it may be exercised. Following the Bywater decision, the Commissioner issued Taxation Ruling TR 2018/5 Income tax: central management and control test of residency (TR 2018/5), which sets out the Commissioner's view on how to apply the CM&C test of company residency.

TR 2018/5 outlines four matters that are relevant in determining whether a company (a) carries on business in Australia; and (b) has its central management and control in Australia which will be considered below: (1)          does the company carry on business in Australia? (2)          what does 'central management and control' mean? (3)          who exercises central management and control? (4)          where is central management and control exercised? (1)          Does the company carry on business in Australia? In Malayan Shipping Co Ltd v FCT (1946) 71 CLR 156 it was held that the location of the CM&C in Australia will constitute the carrying on of business. This view was adopted by the Commissioner as stated in TR 2018/5: 7. If a company carries on business and has its central management and control in Australia, it will carry on business in Australia within the meaning of the central management and control test of residency.

8. It is not necessary for any part of the actual trading or investment operations of the business of the company to take place in Australia. This is because the central management and control of a business is factually part of carrying on that business. Carries on a business Entity X's principal activity is that of property investment holding, with the properties located Australia. Entity X's business was established in Australia and involves significant, repeated and regular activities for the purposes of profit. Therefore, Entity X carries on a business in Australia. Whether Entity X's central management and control takes place in Australia will be considered below. (2)          What does 'central management and control' mean? Paragraph 10 of TR 2018/5, states that CM&C refers to the control and direction of a company's operations. Paragraph 11 of TR 2018/5 provides that the key element in the control and direction of a company's operations is the making of high-level decisions that set the company's general policies, and determine the direction of its operations and the type of transactions it will enter. Practical Compliance Guideline PCG 2018/9

Central management and control test of residency: identifying where a company's central management and control is located (PCG 2018/9) provides that what constitutes high-level decision making of a company is a question of fact to be determined in light of the company's overall business activities. TR 2018/5 states that decision-making involves a person or a group of people actively considering and deciding to do something based on it being in the best interests of the company. It does not include the 'mere implementation of, or rubberstamping of decisions made by others'. Paragraph 12 of TR 2018/5 states that the control and direction of a company is different from the day-to-day conduct and management of its activities and operations. The day-to-day conduct and management of a company's activities and operations is not ordinarily an act of central management and control. Nor is the management of day-to-day activities under the authority and supervision of higher-level managers or controllers. Paragraph 16 of TR 2018/5 provides the following examples of what acts involve exercising CM&C: •                     setting investment and operational policy including:

­        setting the policy on disposal of trading stock, and/or the use and development of capital assets ­        deciding to buy and sell significant assets of the company •                     appointing company officers and agents and granting them power to carry on the company's business (and the revocation of such appointments and powers) •                     overseeing and controlling those appointed to carry out the day-to-day business of the company, and •                     matters of finance, including determining how profits are used and the declaration of dividends. Further, paragraph 18 of TR 2018/5 states that the nature of a company's activities and business define which acts and decisions are an exercise of the central management and control of that company. (3)          Who exercises CM&C? Paragraph 19 of TR 2018/5 states that identifying who exercise CM&C is a question of fact. Paragraphs 20-22 of TR 2018/5 provide the following:

20. Normally, where a company is run by its directors in accordance with its constitution and the company law rules applicable to that company, which give its directors the power to manage the company, the company's directors will control and direct its operations. It follows that ordinarily it is a company's directors who exercise its central management and control. 21. However, the actions of a company's directors, or others with the legal power and authority to control and manage the company, are not the end of the enquiry as to who exercises central management and control. There is no presumption that the directors of a company will always exercise its central management and control. 22. When determining who exercises a company's central management and control, all the relevant facts and circumstances must be considered. Facts and circumstances to be considered in determining who exercises a company's central management and control include the role of anyone who assumes the role of the directors' role in managing and controlling the company's affairs or has a role in the decision-making processes or governance of the company.

Under paragraph 24 of TR 2018/5 a person may control and direct a company without actively intervening in the company's affairs on an ongoing basis provided they: •                     have appointed agents or managers whom they tacitly control to conduct the company's day-to-day business •                     tacitly control and regularly exercise oversight of the affairs of the company, including monitoring the company's performance, and •                     do not need to actively intervene because the company's affairs are running smoothly and in the manner they desire. PCG 2018/9 provides guidance at paragraphs 10-14, that the ordinary starting point for identifying who exercises central management and control will be the board minutes. However, it will be necessary to look at other evidence when a company has not kept minutes, makes high-level decisions outside board meetings, the minutes do not disclose where directors are making high-level decisions, or the minutes are false. Other evidence may include documents that identify who have the formal power to make high-level decisions, such as the constitution or other delegating documents.

(4)          Where is the CM&C exercised? In determining where CM&C of a company is exercised, paragraph 30 of TR 2018/5 provides: 30. A company will be controlled and directed where those making its high-level decisions do so as a matter of fact and substance. It is not where they are merely recorded and formalised, or where the company's constitution, bylaws or articles of association require it to be controlled and directed, if in reality it occurs elsewhere. This will not necessarily be the place where those who control and direct a company live. 31. Control and direction of a company may be undertaken by those controlling a company in multiple places. This means a company's central management and control may be divided between more than one place. However, a company's central management and control will only be exercised in a place for the purpose of the central management and control test if it is exercised in that place to a substantial degree, sufficient to conclude the company is really carrying on business there. PCG 2018/9 provides guidance on situations where decisions are made in more than one place as follows:

75. ... The central management and control test of residency is focused on identifying where a company's control and direction is exercised in substance. This is regardless of whether decisions are made in traditional face-to-face meetings or with the aid of modern communications technology. 76. A company's decisions may be made in more than one place in 2 basic situations. The directors may: (a)           physically meet in multiple different locations where they exercise central management and control of the company - for example, they regularly hold board meetings in more than one country, or (b)           not physically meet in person to make decisions - for example, decisions are made by the directors by phone or video conference, written circular resolution or by email while they are in different physical locations. ... 78. Where board meetings are conducted via electronic facilities (rather than physical attendance) the focus is on where the participants contributing to the high-level decisions are located rather than where the electronic facilities are based.

79. The question of where central management and control is located is determined by reference to how it is exercised over time. An occasional or one-off exercise of high-level decision-making in a particular place outside the normal course of how a company's central management and control is exercised, does not cause it to be in that place for the purpose of the central management and control test, unless: (a)           it is, by itself, substantial in the context of the company, or (b)           it forms part of a regular pattern of central management and control being exercised in that place that is substantial in the context of the company. Paragraph 32 of TR 2018/5 states that the nature of a company's business activities may dictate where its key decisions must be made as a matter of practice. While no single factor will necessarily determine where CM&C is exercised, paragraph 36 of TR 2018/5 lists the following matters that are most likely to influence a court's decision, as to where those who control and direct the operations of a company do so from: •                     where those who exercise central management control do so, rather than where they live

•                     where the governing body of the company meets •                     where the company declares and pays dividends •                     the nature of the business and whether it dictates where control and management decisions are made in practice •                     minutes or other documents recording where high-level decisions are made. Paragraph 37 lists the following other matters of lesser weight, the courts have considered in analysing where a company's central management and control is exercised: •                     where those who control and direct the company's operations live •                     where the company's books are kept •                     where its registered office is located •                     where the company's register of shareholders is kept •                     where the shareholder's meetings are held •                     where its shareholders reside.

PCG 2018/9 provides that if a company has board minutes showing a complete record of where all its high-level decisions were made and who made them, the Commissioner will accept them as prima facie establishing where the company's central management and control was located. Application to Entity X What does central management and control mean? The nature of Entity X's operations is property investment holding in Australia. Therefore, the relevant high-level decisions would involve setting Entity X's general polices and determining the direction if its operations and the type of transactions it will enter, appointing individuals and granting them power to carry on the company's business, overseeing and controlling these individuals and matters of finance. Who exercises central management and control? Generally, it's the company's Board of Directors who exercise central management and control, however, the facts and circumstances must be considered, and the ordinary starting point is the board minutes. As shown in board minutes, Entity X's Board of Directors is responsible for the following:

•                     considering and resolving the company's asset plans and company strategy •                     considering the capital expenditure process approval, budget and policy regarding delegation of approval •                     considering and approving significant capital expenditure on X work •                     questioning an investment manager on the financial performance •                     deciding to issue additional shares •                     declaring dividends •                     resolving to amend a financing agreement. Given the nature of Entity X's business, the decisions made by the Board of Directors outlined above are the relevant high-level decisions as they involve setting investment and operational policy, appointing investment managers and granting them power to carry on the company's business, overseeing and controlling the investment managers and matters of finance. Therefore, Entity X's Board of Directors are exercising central management and control. Where is central management and control exercised?

Where central management and control is exercised is where those making its high-level decisions do so as a matter of fact and substance. When board meetings are conducted via Zoom the focus is on where the participants contributing to the high-level decisions are located as well as the other factors outlined in TR 2018/5. During the relevant income years, no single director dictated or controlled the decisions made by the directors to the exclusion of the other directors. Nor was it the case that any person outside of the board dictated or controlled the decisions made by the directors. All Entity X's board meetings were held in Australia and using video conferencing for overseas directors who would join via a Zoom link. At least half of the directors would be physically present in Australia while remaining directors would dial in from overseas. Based on the above, it is considered that Entity X's Board of Directors exercise central management and control in Australia. Therefore, Entity X carries on business in Australia for the purposes of the definition of 'resident' in subsection 6(1) of the ITAA 1936.

Therefore, Entity X is an Australian resident company under the CM&C test within section 6(1) of the ITAA 1936 from 1 January 2023. Issue 2 Question 2 Is Entity X an 'Australian Entity' within the meaning of the third party debt conditions in paragraph 820-427A(3)(e) of the ITAA 1997? Summary Entity X is an 'Australian Entity' within the meaning of the third party debt conditions in paragraph 820-427A(3)(e) of the ITAA 1997. Detailed reasoning Background Thin capitalisation is a regime found in Division 820 of the ITAA 1997. The Division applies to foreign controlled entities, Australian entities that operate internationally and foreign entities that operate in Australia. Section 820-30 provides that the Division's objective is to ensure such entities do not reduce their tax liabilities by using an excessive amount of debt deductions in financing their Australian operations. Division 820 was amended by Treasury Laws Amendment (Making Multinationals Pay Their Fair Share - Integrity and Transparency) Act 2024

(Act No 23 of 2024), which introduced new earnings-based test for 'general class investors' to disallow all or part of their debt deductions for an income year. A 'general class investor' (section 820-46 of the ITAA 1997) could apply the fixed ratio test, the group ratio test or the third party debt test (subdivision 820-AA of the ITAA 1997). Third party debt test The third party debt test (TPDT) is an elective test (effective from 1 July 2023), which examines whether each debt instrument is genuine third party debt used to fund Australian business operations but disallows debt deductions that do not meet the requisite conditions.

Each debt instrument is tested under the third party debt conditions and where these conditions are satisfied, the debt ductions are allowable. The TPDT effectively disallows an entity's debt deductions to the extent that they exceed the 'third party earnings limit' for the year in question under section 820-50 of the ITAA 1997. The third-party earnings limit for a particular year is the sum of each debt deduction of the entity attributable to a debt interest issued by the entity that satisfies 'the third-party debt conditions' in relation to the income year outlined in subsection 820-427A(3) of the ITAA 1997. Essentially, for each debt instrument that satisfies the third party debt conditions, its associated deductions will be allowed. Subdivision 820-EAB of the ITAA 1997 sets out some basic concepts concerning the third party debt test and section 820-427A provides the meaning of third party earnings limit and third party debt conditions. 'Australian entity'

For income tax purposes 'Australian entity' is defined in section 995-1(1) of the ITAA 1997 as having the same meaning in ITAA 1936 Part X. However, its meaning is modified for the purposes of Subdivision 820-EAB of the ITAA 1997 in relation to partnerships. The term 'Australian entity' is used in Subdivision 820-EAB of the ITAA 1997 (Third party debt concepts) to ensure trusts and partnerships can access the third party debt test. Subsection 820-427A(3) of the ITAA 1997 outlines the third party debt conditions which include under paragraph (e) that 'the entity is an Australian entity' (see section 820-427E): (3) A debt interest issued by an entity satisfies the third party debt conditions in relation to an income year if the following conditions are satisfied: (a)           the entity issued the debt interest to an entity that is not an * associate entity (see section 820 - 427D) of the entity; (b)           the debt interest is not held at any time in the income year by an entity that is an associate entity of the entity;

(c)           disregarding recourse to minor or insignificant assets, the holder of the debt interest has recourse for payment of the debt to which the debt interest relates only to Australian assets that: (i)            are covered by subsection (4); and (ii)           (ii) are not rights covered by subsection (5) (about credit support rights); (d)           the entity uses all, or substantially all, of the proceeds of issuing the debt interest to fund its commercial activities in connection with Australia that do not include: (i)            any business carried on by the entity at or through its overseas permanent establishments; and (ii)           the holding by the entity of any * associate entity debt, • controlled foreign entity debt or controlled foreign entity equity; (e)           the entity is an * Australian entity (see section 820 - 427E). Section 820-427E of the ITAA 1997 provides: For the purposes of this Subdivision, in determining whether an entity is an *Australian entity at a particular time:

(a)           for the purposes of paragraph 336(a) of the ITAA 1936, treat a partnership as being an Australian entity if, at that time, a *direct participation interest of 50% or more is held in the partnership by one or more of the following: (i)            an Australian resident; (ii)           an *Australian trust; and (b)           disregard section 337 of that Act. Section 336 of the ITAA 1936 provides: For the purposes of this Part, each of the following is an Australian entity: (a)           an Australian partnership; (b)           an Australian trust; (c)           an entity (other than a partnership or trust) that is a Part X Australian resident. As Entity X is a company and not a trust or partnership, it is not affected by the modified meaning for the purposes of Subdivision 820-EAB of the ITAA 1997. Rather it will be an 'Australian entity' if it is an entity that is a Part X Australian resident (per subsection 336(c) of the ITAA 1936). A Part X Australian resident is defined in section 317 of the ITAA 1936 as follows: ... a resident within the meaning of section 6, but does not include an entity where:

(a)           there is a double tax agreement in force in respect of a foreign country; and (b)           that agreement contains a provision that is expressed to apply where, apart from the provision, the entity would, for the purposes of the agreement, be both a resident of Australia and a resident of the foreign country, and (c)           that provision has the effect that the entity is, for the purposes of the agreement, a resident solely of the foreign country. Entity X is an Australian resident within the meaning of section 6. Therefore, the specific carve outs in paragraphs (a) to (c) in the definition of Part X Australian Resident need to be considered. Entity X was incorporated in Country X and there is a double tax agreement in force between Australia and Country X, therefore paragraphs (b) and (c) of section 317 of the ITAA 1936 need to be considered. Whilst there is a possibility that some entities may, for the purposes of the Country X DTA, be both a resident of Australia and Country X, the Country X DTA then applies to determine whether the entity shall be treated solely as a resident of Country X or Australia depending on where it is managed and controlled.

Entity X is managed and controlled in Australia by its Board of Directors and is an Australian resident under section 6 of the ITAA 1936 (as determined in Question 1). Therefore, it is an 'Australian company' under the Country X DTA as it is a resident of Australia that is managed and controlled in Australia. As Entity X is an 'Australian company' it is also an 'Australian resident'. Therefore, Entity X is an 'Australian Entity' within the meaning of the third party debt conditions in section 820-427A(3)(e) of the ITAA 1997. Question 3 Will the funds held in Entity X's overseas bank accounts be considered to be 'minor or insignificant assets' for the purposes of paragraph 820-427A(3)(c) of the ITAA 1997 for the period XX XXX 20XX to XX XXX 20XX? Summary The funds in Entity X's overseas bank accounts are considered to be 'minor or insignificant assets' for the purposes of paragraph 820-427A(3)(c) of the ITAA 1997 for the period XX XXX 20XX to XX XXX 20XX . Detailed reasoning One of the third party debt conditions under paragraph 820-427A(3)(c) of the ITAA 1997 is as follows:

(c) disregarding recourse to minor or insignificant assets, the holder of the debt interest has recourse for payment of the debt to which the debt interest relates only to Australian assets that: (i) are covered by subsection (4); and (ii) are not rights covered by subsection (5) (about credit support rights). Paragraph 820-427A(3)(c) is tested continuously throughout the period the relevant debt interest is on issue. A debt interest that is on issue for the whole income year must satisfy paragraph 820-427A(3)(c) for the whole income year. A debt interest is on issue for part of an income year will satisfy paragraph 820-427A(3)(c) 'in relation to an income year' if it satisfies that paragraph throughout the period it is on issue. Minor or insignificant The words 'minor' and 'insignificant' are not defined in the ITAA 1936 or ITAA 1997 and therefore, their ordinary meaning is considered. The Macquarie Dictionary, [Online], viewed 12 March 2025 www.macquariedictionary.com.au defines 'minor' as: adjective 1. lesser, as in size, extent, or importance, or being the lesser of two: a minor share; minor faults. 'Insignificant' is defined as: adjective

1. unimportant, trifling, or petty, as things, matters, details, etc. 2. too small to be important: an insignificant sum. 3. of no consequence, influence, or distinction, as persons. 4. without weight of character; contemptible: an insignificant fellow. 5. without meaning; meaningless, as terms. Section 15AA of the Acts Interpretation Act 1901 provides that when 'interpreting a provision of an Act, the interpretation that would best achieve the purpose or object of the Act (whether or not the purpose or object is expressly stated in the Act) is to be preferred to each other interpretation'. The Explanatory Memorandum to the Treasury Law Amendment (Making Multinationals Pay Their Fair Share - Integrity and Transparency) Bill 2023 (Explanatory Memorandum) provides the following rationale:

1.30        Recourse to minor and insignificant ineligible assets (i.e., assets which are not mentioned in the paragraph immediately above, such as an asset which is not an Australian assets), is disregarded. This allowance is intended to prevent paragraph 820-427A(3)(c) being contravened for inadvertent and superficial reasons. Determining whether recourse to ineligible assets is minor and insignificant will generally require a consideration of the ineligible assets to which recourse for payment of the debt can be had and whether those ineligible assets are of a minor and insignificant nature. 1.31        The general prohibition on recourse to credit support rights is maintained. The prohibition ensures that multinational groups do not have an unfettered ability to 'debt dump' third party debt in Australia that is recoverable against the global group. Taxation Ruling TR 2025/2 Income tax: aspects of the third party debt test in Subdivision 820-EAB of the Income Tax Assessment Act 1997 (TR 2025/2) provides some guidance and examples on what are considered to be minor or insignificant assets as follows:

65. Under paragraph 820-427A(3)(c), recourse to 'minor or insignificant assets' is disregarded when determining the assets the holder of the debt interest has recourse to. This is intended to prevent paragraph 820-427A(3)(c) being contravened for inadvertent and superficial reasons, namely, because the holder has recourse to assets that are not covered by paragraph 820-427A(3)(c), but which are only minor or insignificant in nature. The exception covers assets of minimal or nominal value. 66. The actual or hypothetical impact of any ineligible assets on the quantum or terms of the debt interest is not determinative of whether those assets are minor or insignificant. Example 8 - minor or insignificant assets 69. Aus Co holds assets including all the issued shares in Sub Co. Sub Co holds assets including all the issued shares in a foreign subsidiary, Foreign Sub Co. Foreign Sub Co has share capital of $2 and does not hold any assets. 70. Aus Co borrows $50 million from an unrelated entity, Bank. Under the terms of the borrowing, Bank has recourse for payment of the debt to all Aus Co and Sub Co's assets, including the shares Sub Co holds in Foreign Sub Co. 71.

The shares Sub Co holds in Foreign Sub Co are minor and insignificant assets because of their nominal value. Recourse Bank has to those shares is therefore disregarded for the purposes of paragraph 820-427A(3)(c). Example 9 - relative values not determinative 72. Aus Hold Co owns 2 Australian subsidiaries, Aus Sub 1 and Aus Sub 2, and a New Zealand subsidiary, NZ Sub. 73. The market value of the shares in NZ Sub is $10 million. This represents approximately 2% of the market value of all the assets of the Aus Hold Co group. 74. Aus Hold Co borrows $100 million from an unrelated entity, Bank. Under the terms of the borrowing, Bank has recourse to all assets of the Aus Hold Co group, including all the shares in NZ Sub. 75. The shares in NZ Sub Co are not minor or insignificant assets for the purposes of paragraph 820-427A(3)(c) because they are not of minimal or nominal value. The fact they represent a relatively small proportion of the market value of the assets of the Aus Hold Co group is not determinative of whether they are minor or insignificant assets. Further, Practical Compliance Guideline PCG 2025/2

Restructures and the thin capitalisation and debt deduction creation rules - ATO compliance approach (PCG 2025/2) provides further guidance on 'minor or insignificant assets', within the context of providing a compliance approach for restructures relating to minor or insignificant assets, as follows: 293. ...Consistent with TR 2025/2, an asset is minor or insignificant if it is of a minimal or nominal value. ... 295. This compliance approach is intended to facilitate taxpayers determining whether to restructure their affairs to comply with the TPDT as it comes into operation. ... 297. It applies only for the purpose of considering whether paragraph 820-427A(3)(c) or 820-427A(4)(b) is satisfied in the period prior to the restructure (as set out in Examples 32 and 33 of this Guideline). 298. Where taxpayers satisfy the following criteria prior to the restructure, we will only apply compliance resources to verify that this compliance approach applies: •                     You make reasonable efforts to identify minor or insignificant assets of the obligor group that are not Australian assets, and both of the following apply:

­        The market value of those assets identified is less than 1% of all of the assets to which the holder of the debt interest has recourse for the payment of the debt. ­        The market value of each asset (or bundle of identical assets, such as a shareholding) does not exceed $1 million. •                     None of those assets are credit support rights. Example 32 - compliance approach for small asset holding 299. Aus Hold Co wholly owns 2 Australia subsidiaries, Aus Sub Co 1 and Aus Sub Co 2, and one foreign-resident subsidiary, CFC. All entities are general class investors. 300. Aus Hold Co borrows $1 billion from Bank, not an associate entity. Under the terms of the loan, Bank has recourse to all of assets of the Aus Hold Co group, including foreign assets held by CFC. 301. Aus Hold Co's shares in CFC are not Australian assets. The market value of CFC is approximately 1% of all of assets of the entities to which the lender has recourse. 302. In order to comply with the TDPT after the compliance period ends, Aus Hold Co amends the terms of the loan so that Bank does not have recourse to the CFC.

In this case the relevant assets are Entity X's overseas bank accounts with a combined balance that did not exceed $XX during the relevant period. As stated in the Explanatory Memorandum the allowance for 'minor or insignificant assets' is intended to prevent paragraph 820-427A(3)(c) being contravened for inadvertent and superficial reasons. On the balance of the facts and circumstances, the funds in the overseas bank accounts are 'minor or insignificant' assets and therefore do not prevent Entity X from satisfying paragraph 820-427A(3)(c) of the ITAA 1997.