Private ruling: Investment income and deductions
Date of advice: 11 April 2022
Published: July 2022
Ruling period: Year ended 30 June 2021 | Year ended 30 June 2022 | Year ending 30 June 2023 | Year ending 30 June 2024 | Year ending 30 June 2025 | Year ending 30 June 2026 | Year ending 30 June 2027 | Year ending 30 June 2028
Date scheme commenced: 21 June 2021

Ruling: A6: Yes . Under section 207-20 of the ITAA 1997, an entity that receives a franked distribution is entitled to a tax offset for the income year in which the distribution is made. You are entitled to a tax offset under Division 207 and, as none of the exceptions under section 67-25 apply, you will also be subject to the refundable tax offset rules in Division 67.

Relevant facts and circumstances: You are a resident of Australia and will remain so for the whole of the relevant period. You have a loan through a registered financial corporation with the Australian Prudential Regulatory Authority (the Lender). You acquired a loan from the Lender to purchase fully paid ordinary shares in a company. You elected to acquire an upside cap and a put option and are wholly or partially protected from a fall in the market value of the shares. Your agreement with the Lender includes the following important terms: • The Lender advanced loans to you for the sole purpose of purchasing shares in a specified company; • your shares may be purchased in the name of the Lender's nominee (the Trustee) and you retain a beneficial interest in the shares; • you must pay interest to the Lender at the variable interest rate determined by the Lender; • the loan is a full recourse loan; • you are absolutely entitled to the shares as against the Trustee and on the Maturity Date or Early Maturity Date of each loan, you may elect to transfer the shares into your name; • you are not entitled to elect to use a dividend reinvestment plan offered by a Company; • you grant a security interest to the Lender over the shares and other entitlements and benefits relating to the shares purchased by you; and • if there is a default by you under the agreement, the Lender may exercise comprehensive powers in relation to the shares. The Trustee holds the shares for your sole benefit. Within a reasonable period of time following receipt of each relevant case dividend paid by the company to the Trustee, the Trustee pays you the cash dividend amount.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 6(1) | Income Tax Assessment Act 1936 subsection 44(1) | Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 subsection 6-5(2) | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 Division 67 | Income Tax Assessment Act 1997 subsection 67-25 | Income Tax Assessment Act 1997 Division 207 | Income Tax Assessment Act 1997 subsection 207-20(1) | Income Tax Assessment Act 1997 Division 247


Question one: Are the dividends assessable income of the taxpayer within the meaning of section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | Answer: Yes . Dividend income is classed as ordinary income and is assessable under section 6-5 of the ITAA 1997. | Question two: If yes to 1, on what date is a dividend assessable income: | (a) The Company's dividend payment date | (b) The date received by the Trustee; or | (c) The date received by the Taxpayer? | Answer: The Company's dividend payment date is the relevant date. Under subsection 44(1) of the Income Tax Assessment Act 1936 (ITAA 1936), an Australian resident shareholder is assessable on all dividends paid to the shareholder by a company out of profits derived from any source. 'Paid' is defined in subsection 6(1) of the ITAA 1936 and includes 'credited' or 'distributed'. | Question three: Are the imputation credits arising from the dividends assessable income within the meaning of section 6-5 of the ITAA 1997? | Answer: Yes . Subsection 207-20(1) of the ITAA 1997 provides that if an entity makes franked distributions to another entity, the amount of the franking distribution is included in the taxable income of the receiving entity in the year in which the distribution is made. | Question four: Will Division 247 of the ITAA 1997 apply to the loan? | Question five: Subject to compliance with Division 247 of the ITAA 1997, is the interest on the Loan charged to you by LEL deductible under paragraph 8-1(1)(a) of the ITAA 1997? | Answer: Yes . Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where they are of a capital, private or domestic nature, or relate to the earning of exempt income. The interest expenses associated with your investment loan are an allowable deduction. | Question six: Are you eligible for a refund of any excess franking tax offsets arising from the imputation credits attached to the dividends?