e_dipn13a_Interest Expense_s16(2ABC)

Where the arrangement is in place for only part of

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Unformatted text preview: which the interest payable will be reverted back to the borrower or his connected person. Where the arrangement is in place for only part of the basis period during which the loan interest is incurred, the interest expenses can be apportioned on a time basis. This means that only the portion of interest attributable to the period of time during which the arrangement is in place will be disallowed from deduction. Example 12 Company L borrowed a loan of $10M from Bank M at the interest rate of 10% p.a. At its inception, $7M of the loan was sub-participated by Company N, an associate company of Company L. The repayment by Bank M to Company N of the principal and interest of the $7M loan was made conditional to or secured by the repayment of principal and interest of the $10M loan made by Company L to Bank M. In a year of assessment Company L paid interest of $1M to Bank M, and correspondingly Bank M paid interest in the amount attributable to the $7M loan to Company N. 15 In this example only $7M of the total loan was sub-participated by a person connected with the borrower (Company L). Thus only the interest attributable to the sub-participated portion, that is the amount of $700,000 ($1M x 7/10), is subject to the adjustment under section 16(2B). As this part of the loan was participated for the whole period during which interest was incurred, the full amount of the $700,000 interest would be disallowed by section 16(2B). However, the interest on the remaining part of loan which was not sub-participated by the borrower or a person connected to him (in this case interest of $300,000) would be allowable for deduction. Example 13 If in Example 12, the loan of $7M (C) was sub-participated by Company N for only 6 months (A) during the basis period of the year of assessment (B) concerned, the operation of section 16(2B) will be as follows – ($M) 0.7 Interest payable on the portion of loan which was sub-participated to Company N Deduct: by the amount (A/B x C) (183days / 365 days x $0.7M) Interest on sub-participated loan deductible Add: Interest on the porti...
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