Income tax: does Division 13 of the Income Tax Assessment Act 1936 apply to impute interest income to an Australian company which makes an interest-free loan to a non-resident subsidiary to enable this subsidiary to guarantee a third party loan to another non-resident subsidiary?

Yes. When a company confers a benefit on another company for non-arm's length consideration, section 136AD would apply (Taxation Ruling IT 92/11).

The existence of a business purpose for the transaction is not in itself sufficient to preclude the making of an adjustment under Division 13. Example: An Australian parent company lends money interest-free to an off-shore subsidiary ( the first subsidiary). This subsidiary acts as guarantor for a second off-shore subsidiary. The first subsidiary invests the money in an off-shore market and repays the loan to the Australian company when the guarantee is released. Division 13 will apply to impute an arm's length interest rate to the parent company.