Interest: disguised interest: what is disguised interest?
Disguised interest is the return that is produced from arrangements that give rise to an amount that is ‘economically equivalent to interest’ without constituting interest in legal form.
See SAIM2030 onwards, and the Corporate Finance Manual at CFM33030 onwards for a more detailed explanation of the case law on the meaning of interest.
A return that is economically equivalent to interest will have the following features:
- It is calculated by reference to the time value of money.
- It is comparable to a commercial rate of interest.
- There is no practical likelihood at the ‘relevant time’ of the return not being produced, unless the producer is prevented by insolvency or otherwise from producing it.
These features are explained in more detail at SAIM2730.