Product Ruling PR 2018/6
Date of effect: 1 July 2017

What this ruling is about: 1. This Product Ruling sets out the Commissioner's opinion on the way in which the relevant provisions identified in the Ruling section apply to the defined class of entities who take part in the scheme to which this Ruling relates. All legislative references in this Ruling are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise indicated. 2. In this Product Ruling the scheme is an investment in a Property Investor Trust (the Trust) offered by CNIP Pty Ltd by way of subscription for Units in the Trust using borrowings on arm's length and commercial terms from an independent or related party, or both. 3. This Product Ruling does not address: Class of entities 4. This part of the Product Ruling specifies which entities can rely on the Ruling section of this Product Ruling and which entities cannot rely on the Ruling section. In this Product Ruling, the entities that can rely on the Ruling are referred to as the Registered Holder. 5. The class of entities who can rely on the Ruling section of this Product Ruling consists of those entities: 6. The class of entities who can rely on the Ruling section of this Product Ruling does not include entities that: Superannuation Industry (Supervision) Act 1993 7. This Product Ruling does not address the provisions of the Superannuation Industry (Supervision) Act 1993 (SISA). The Commissioner gives no assurance that the scheme is an appropriate investment for a superannuation fund. The trustees of superannuation funds are advised that no consideration has been given in this Product Ruling as to whether investment in this scheme may contravene the provisions of SISA. Qualifications 8. The class of entities defined in this Product Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 16 to 20 of this Product Ruling. 9. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then:

Class of entities or scheme: 4. This part of the Product Ruling specifies which entities can rely on the Ruling section of this Product Ruling and which entities cannot rely on the Ruling section. In this Product Ruling, the entities that can rely on the Ruling are referred to as the Registered Holder. 5. The class of entities who can rely on the Ruling section of this Product Ruling consists of those entities: 6. The class of entities who can rely on the Ruling section of this Product Ruling does not include entities that: | Superannuation Industry (Supervision) Act 1993: 7. This Product Ruling does not address the provisions of the Superannuation Industry (Supervision) Act 1993 (SISA). The Commissioner gives no assurance that the scheme is an appropriate investment for a superannuation fund. The trustees of superannuation funds are advised that no consideration has been given in this Product Ruling as to whether investment in this scheme may contravene the provisions of SISA. | Qualifications: 8. The class of entities defined in this Product Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 16 to 20 of this Product Ruling. 9. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then: 10. This Product Ruling applies prospectively from 1 July 2017. It applies only to the specified class of entities that enter into the scheme from 1 July 2017 and whose Units in the Trust are allotted on or before 30 June 2020. This Product Ruling provides advice on the availability of tax benefits to the specified class of entities for the income years up to 30 June 2020, being its period of application. This Product Ruling will continue to apply to those entities even after its period of application has ended for the scheme entered into during the period of application. 11. However the Product Ruling only applies to the extent that there is no change in the scheme or in the entity's involvement in the scheme. | Changes in the law: 12. Although this Product Ruling deals with the income tax laws enacted at the time it was issued, later amendments may impact on this Product Ruling. Any such changes will take precedence over the application of this Product Ruling and, to that extent, this Product Ruling will have no effect. 13. Entities who are considering participating in the scheme are advised to confirm with their taxation adviser that changes in the law have not affected this Product Ruling since it was issued. | Note to promoters and advisers: 14. Product Rulings were introduced for the purpose of providing certainty about tax consequences for entities in schemes such as this. In keeping with that intention the Commissioner suggests that promoters and advisers ensure that participants are fully informed of any legislative changes after the Product Ruling has issued. 15. Subject to paragraph 3 and the assumptions in paragraph 20 of this Ruling: 16. The scheme that is the subject of this Ruling is identified and described in the following documents: Note: certain information has been provided on a commercial-in-confidence basis and will not be disclosed or released under Freedom of Information legislation. 17. For the purposes of describing the scheme to which this Ruling applies, there are no other agreements, whether formal or informal, and whether or not legally enforceable, which a Registered Holder or any associate of a Registered Holder, will be a party to, which are a part of the scheme. 18. All Australian Securities and Investments Commission (ASIC) requirements are, or will be, complied with for the term of the agreements. | Overview: 19. Following is a summary of the scheme: | Assumptions: 20. This Ruling is made on the basis of the following necessary assumptions: Commissioner of Taxation 27 June 2018 | Assessability of Trust income: 21. Under the terms of the Units issued, the Registered Holder has fixed rights to certain income and capital gains derived by the Trust in respect of the Unit Asset(s) that the Units are related to. 22. To the extent that the net income of the Trust constitutes net income other than capital gains or franked distributions, the Registered Holder shall be assessable under section 97 of the ITAA 1936 on so much of the share of that net income of the Trust as reflects the proportion of income of the trust estate to which the Registered Holder is presently entitled, as adjusted by Division 6E of the ITAA 1936. 23. Where the net income of the Trust includes a net capital gain, subsection 115-215(3) will deem the Registered Holder to have made a capital gain referable to their attributable gain as calculated under section 115-225 and as adjusted under subsection 115-215(3) to take into account certain capital gains tax concessions claimed by the Trustee. 24. Where the net income of the Trust includes a franked distribution, the Registered Holder shall be required under subsection 207-35(4) to include in its assessable income its attributable franked distribution as calculated under section 207-37 and its share of any franking credit on the distribution. | Section 8-1 - interest expenses: 25. Section 8-1 provides a taxpayer with a deduction for a loss or outgoing to the extent to which it is incurred in gaining or producing the taxpayer's assessable income. A loss or outgoing is not deductible to the extent that it is of a private or domestic nature. 26. For the purposes of section 8-1, the essential character of an interest expense is derived from the purpose of the borrowing and the application or the use of the borrowed funds. The laying out of the borrowed money for the purpose of gaining assessable income furnishes the required connection between the interest paid upon it by the taxpayer and the income derived by that taxpayer from its use ( Ure v. Federal Commissioner of Taxation (1981) 50 FLR 219; 81 ATC 4100 at 4104; (1981) 11 ATR 484 at 488). 27. Whilst interest paid on a borrowing used to acquire income producing assets such as units in a unit trust is generally treated as deductible under section 8-1 where it is expected that assessable income would be derived from the investment (see Taxation Ruling TR 95/33 Income tax: subsection 51(1) - relevance of subjective purpose, motive or intention in determining the deductibility of losses and outgoing ), a portion of an interest expense is not deductible to the extent that the borrowed money has been used to both acquire an income producing asset and to confer benefits on other persons (see Taxation Determination TD 2009/17 Income tax: is interest on a loan fully deductible under section 8-1 of the Income Tax Assessment Act 1997 when the borrowed moneys are settled by the borrower on trust to benefit the borrower and others? ). 28. The interest incurred by the Registered Holder in respect of borrowings used to fund their subscription for Units in the Trust is wholly deductible under section 8-1 because the funds borrowed are not used to confer benefits on other persons (including other General Beneficiaries or any Remainder Beneficiaries). 29. This Ruling does not apply to Registered Holders who choose, or who are required to prepay interest under the borrowing taken out to subscribe for Units in the Trust. Subject to certain exclusions, amounts that are prepaid for a period that extends beyond the income year in which the expenditure is incurred may be subject to the prepayment provisions in Subdivision H of Division 3 of Part III of the ITAA 1936. Any Registered Holder who prepays such amounts may request a private ruling on the deductibility of interest in relation to their investment in the Trust. | Section 25-25 - borrowing expenses: 30. Borrowing expenses incurred by the Registered Holder in respect of borrowings used to fund their subscription for Units in the Trust will be deductible under section 25-25. Where the borrowing expenses are $100 or less, they are wholly deductible in the income year incurred. Where the borrowing expenses exceed $100, the deduction is spread on a straight line basis over the period of the shorter of: | Section 51AAA: 31. Under the scheme, it is contemplated that the Registered Holder will derive assessable income by way of capital gains and other than by way of capital gains from their Units in the Trust. As the interest and borrowing expenses incurred by the Registered Holder will be deductible under section 8-1 of the ITAA 1997 and 25-25 of the ITAA 1997 respectively notwithstanding the inclusion of a net capital gain in their assessable income, section 51AAA of the ITAA 1936 has no application to the Registered Holder. | Part IVA - anti-avoidance: 32. Provided that the scheme ruled on is entered into and carried out in the manner described in the scheme documentation and in the Scheme section of this Product Ruling including the Assumptions (see paragraphs 19 to 20 of this Ruling), it is accepted that the scheme is an ordinary commercial transaction and that Part IVA of the ITAA 1936 will not apply. 33. The following is a detailed contents list for this Ruling: © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).

Ruling: This Product Ruling has been given on the basis that the entity(s) that applied for the Product Ruling, and their associates, will abide by strict terms of use. Any failure to comply with the terms of use may lead to the withdrawal of this Product Ruling. 1. This Product Ruling sets out the Commissioner's opinion on the way in which the relevant provisions identified in the Ruling section apply to the defined class of entities who take part in the scheme to which this Ruling relates. All legislative references in this Ruling are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise indicated. 2. In this Product Ruling the scheme is an investment in a Property Investor Trust (the Trust) offered by CNIP Pty Ltd by way of subscription for Units in the Trust using borrowings on arm's length and commercial terms from an independent or related party, or both. 3. This Product Ruling does not address: | Class of entities: 4. This part of the Product Ruling specifies which entities can rely on the Ruling section of this Product Ruling and which entities cannot rely on the Ruling section. In this Product Ruling, the entities that can rely on the Ruling are referred to as the Registered Holder. 5. The class of entities who can rely on the Ruling section of this Product Ruling consists of those entities: 6. The class of entities who can rely on the Ruling section of this Product Ruling does not include entities that: | Superannuation Industry (Supervision) Act 1993: 7. This Product Ruling does not address the provisions of the Superannuation Industry (Supervision) Act 1993 (SISA). The Commissioner gives no assurance that the scheme is an appropriate investment for a superannuation fund. The trustees of superannuation funds are advised that no consideration has been given in this Product Ruling as to whether investment in this scheme may contravene the provisions of SISA. | Qualifications: 8. The class of entities defined in this Product Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 16 to 20 of this Product Ruling. 9. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then:


Appendix: Assessability of Trust income: 21. Under the terms of the Units issued, the Registered Holder has fixed rights to certain income and capital gains derived by the Trust in respect of the Unit Asset(s) that the Units are related to. 22. To the extent that the net income of the Trust constitutes net income other than capital gains or franked distributions, the Registered Holder shall be assessable under section 97 of the ITAA 1936 on so much of the share of that net income of the Trust as reflects the proportion of income of the trust estate to which the Registered Holder is presently entitled, as adjusted by Division 6E of the ITAA 1936. 23. Where the net income of the Trust includes a net capital gain, subsection 115-215(3) will deem the Registered Holder to have made a capital gain referable to their attributable gain as calculated under section 115-225 and as adjusted under subsection 115-215(3) to take into account certain capital gains tax concessions claimed by the Trustee. 24. Where the net income of the Trust includes a franked distribution, the Registered Holder shall be required under subsection 207-35(4) to include in its assessable income its attributable franked distribution as calculated under section 207-37 and its share of any franking credit on the distribution. | Section 8-1 - interest expenses: 25. Section 8-1 provides a taxpayer with a deduction for a loss or outgoing to the extent to which it is incurred in gaining or producing the taxpayer's assessable income. A loss or outgoing is not deductible to the extent that it is of a private or domestic nature. 26. For the purposes of section 8-1, the essential character of an interest expense is derived from the purpose of the borrowing and the application or the use of the borrowed funds. The laying out of the borrowed money for the purpose of gaining assessable income furnishes the required connection between the interest paid upon it by the taxpayer and the income derived by that taxpayer from its use ( Ure v. Federal Commissioner of Taxation (1981) 50 FLR 219; 81 ATC 4100 at 4104; (1981) 11 ATR 484 at 488). 27. Whilst interest paid on a borrowing used to acquire income producing assets such as units in a unit trust is generally treated as deductible under section 8-1 where it is expected that assessable income would be derived from the investment (see Taxation Ruling TR 95/33 Income tax: subsection 51(1) - relevance of subjective purpose, motive or intention in determining the deductibility of losses and outgoing ), a portion of an interest expense is not deductible to the extent that the borrowed money has been used to both acquire an income producing asset and to confer benefits on other persons (see Taxation Determination TD 2009/17 Income tax: is interest on a loan fully deductible under section 8-1 of the Income Tax Assessment Act 1997 when the borrowed moneys are settled by the borrower on trust to benefit the borrower and others? ). 28. The interest incurred by the Registered Holder in respect of borrowings used to fund their subscription for Units in the Trust is wholly deductible under section 8-1 because the funds borrowed are not used to confer benefits on other persons (including other General Beneficiaries or any Remainder Beneficiaries). 29. This Ruling does not apply to Registered Holders who choose, or who are required to prepay interest under the borrowing taken out to subscribe for Units in the Trust. Subject to certain exclusions, amounts that are prepaid for a period that extends beyond the income year in which the expenditure is incurred may be subject to the prepayment provisions in Subdivision H of Division 3 of Part III of the ITAA 1936. Any Registered Holder who prepays such amounts may request a private ruling on the deductibility of interest in relation to their investment in the Trust. | Section 25-25 - borrowing expenses: 30. Borrowing expenses incurred by the Registered Holder in respect of borrowings used to fund their subscription for Units in the Trust will be deductible under section 25-25. Where the borrowing expenses are $100 or less, they are wholly deductible in the income year incurred. Where the borrowing expenses exceed $100, the deduction is spread on a straight line basis over the period of the shorter of: | Section 51AAA: 31. Under the scheme, it is contemplated that the Registered Holder will derive assessable income by way of capital gains and other than by way of capital gains from their Units in the Trust. As the interest and borrowing expenses incurred by the Registered Holder will be deductible under section 8-1 of the ITAA 1997 and 25-25 of the ITAA 1997 respectively notwithstanding the inclusion of a net capital gain in their assessable income, section 51AAA of the ITAA 1936 has no application to the Registered Holder. | Part IVA - anti-avoidance: 32. Provided that the scheme ruled on is entered into and carried out in the manner described in the scheme documentation and in the Scheme section of this Product Ruling including the Assumptions (see paragraphs 19 to 20 of this Ruling), it is accepted that the scheme is an ordinary commercial transaction and that Part IVA of the ITAA 1936 will not apply.


What this Ruling is about | NOT LEGALLY BINDING SECTION: | A public ruling is an expression of the Commissioner's opinion about the way in which a relevant provision applies, or would apply, to entities generally or to a class of entities in relation to a particular scheme or a class of schemes. | If you rely on this ruling, the Commissioner must apply the law to you in the way set out in the ruling (unless the Commissioner is satisfied that the ruling is incorrect and disadvantages you, in which case the law may be applied to you in a way that is more favourable for you - provided the Commissioner is not prevented from doing so by a time limit imposed by the law). You will be protected from having to pay any underpaid tax, penalty or interest in respect of the matters covered by this ruling if it turns out that it does not correctly state how the relevant provision applies to you. | Potential participants must form their own view about the commercial and financial viability of the product. The Commissioner recommends a financial (or other) adviser be consulted for such information. | This Product Ruling provides certainty for potential participants by confirming that the tax benefits set out in the Ruling part of this document are available, provided that the scheme is carried out in accordance with the information we have been given, and have described below in the Scheme part of this document. If the scheme is not carried out as described, participants lose the protection of this Product Ruling. | Appendix 2 - Detailed contents list


Related rulings: TR 95/33 TD 2009/17 PR 2011/15 PR 2014/15
Legislative references: ITAA 1936 ITAA 1936 51AAA ITAA 1936 Pt III Div 3 Subdiv H ITAA 1936 Pt III Div 6 ITAA 1936 Div 6E ITAA 1936 97 ITAA 1936 Pt IVA ITAA 1997 ITAA 1997 8-1 ITAA 1997 25-25 ITAA 1997 Div 102 ITAA 1997 Subdiv 115-C ITAA 1997 115-215(3) ITAA 1997 115-225 ITAA 1997 Subdiv 207-B ITAA 1997 207-35(4) ITAA 1997 207-37 ITAA 1997 Div 230 SISA 1993 TAA 1953
Case references: Ure v. Federal Commissioner of Taxation (1981) 50 FLR 219 (1981) 34 ALR 237 (1981) 11 ATR 484 81 ATC 4100 [1981] FCA 9