ATO ID 2006/187: Capital gains tax: early loan repayment benefit - separate asset
Date of decision: 6 July 2006
Year of income: Year ended 30 June 2005
Business line: Public Groups and International

Issue
Is the right to an 'early repayment benefit' under the terms of a loan agreement a CGT asset under section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997) that is separate from the loan agreement?

Decision
No. The right to an 'early repayment benefit' under the terms of a loan agreement is not a CGT asset under section 108-5 of ITAA 1997 that is separate from the loan agreement.

Facts
The taxpayer purchased an investment property in 2003. The taxpayer entered into a loan agreement to finance the purchase of the property. The loan was a fixed rate interest-only loan. It was initially fixed for a five-year period (from 2003 to 2008) at an annual interest rate of 6.24% per annum. A term of the loan agreement was that in the event of early, full repayment, the lender could recover an 'early repayment benefit' or the taxpayer could receive an 'early repayment adjustment', depending on interest rates applicable at the time the loan was broken. As the taxpayer was of the view that interest rates may rise significantly, he instructed the lender to break the original loan and refix it for another five years in 2006. Because of the taxpayer's request, the lender re-fixed the loan at an annual interest rate of 6.64% for a new five-year period. Under the taxpayer's original loan agreement, he received a bonus called an 'early repayment adjustment'.

Reasons for decision
Summary: Under section 108-5 of the ITAA 1997, a CGT asset is any kind of property, or a legal or equitable right that is not property. Taxation Determination TD 93/86 states that generally, the totality of rights under a contract will be regarded as the one CGT asset. In this case, the relevant asset would be the loan agreement and the totality of rights (coupled with the obligations) under the loan agreement would be the one CGT asset. Butterworths Encyclopaedic Australian Legal Dictionary , (Online Edition), LexisNexis Australia defines a loan as 'the temporary transfer of an asset, usually funds, from a lender who controls funds, to a borrower in return for payment, usually in the form of interest. The asset must be returned either in one sum at the maturity of the loan or in periodic payments'. Thus, a liability arises when the debtor borrows money under a loan contract. Accordingly, in this case, the taxpayer, as borrower, did not acquire a CGT asset but instead incurred a legal obligation to repay the funds under the terms of the loan agreement (a liability). The positive attribute of the loan agreement (the early repayment benefit) was merely a feature of the terms of the loan agreement, and it was incidental to the early repayment of the borrowed funds. Consequently, the right to the early repayment benefit does not form a CGT asset that is separate from the loan agreement. Accordingly, there are no CGT consequences for the taxpayer from the receipt of the 'early repayment adjustment' bonus.

Legislative references: Income Tax Assessment Act 1997 section 108-5
Related public rulings and determinations: Taxation Determination TD 93/86
Other references: Butterworths Encyclopaedic Australian Legal Dictionary, (Online Edition), LexisNexis
Subject references: Capital gains tax CGT assets