Product Ruling PR 2017/8
Date of effect: 5 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 (below) 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 referred to as the Swap, being the Macquarie Torque Swap offered by Macquarie Bank Limited (MBL) as part of the Macquarie Torque Facility (Facility). 3. This Product Ruling does not address: Class of entities 4. This part of the Product Ruling specifies which entities: set out in the Ruling section of this Product Ruling. 5. The class of entities that can rely on the Ruling section of this Product Ruling consists of those entities that: These entities are referred to as Investors. 6. The class of entities that can rely on the Ruling section of this Product Ruling does not include entities that: Qualifications 7. 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 15 to 19 of this Ruling. 8. 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: set out in the Ruling section of this Product Ruling. 5. The class of entities that can rely on the Ruling section of this Product Ruling consists of those entities that: These entities are referred to as Investors. 6. The class of entities that can rely on the Ruling section of this Product Ruling does not include entities that: | Qualifications: 7. 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 15 to 19 of this Ruling. 8. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then: 9. This Product Ruling applies prospectively from 5 July 2017, the date it is published. It therefore applies only to the specified class of entities that enter into the scheme from 5 July 2017 until 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. 10. 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: 11. 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. 12. 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: 13. 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. 14. Subject to paragraph 3 and the assumptions in paragraph 19 of this Ruling: 15. 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. 16. 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 an Investor or any associate of an Investor, will be a party to, which are a part of the scheme. Unless otherwise defined, capitalised terms in this Ruling take their meaning as per the Glossary in the Terms and Conditions referred to in paragraph 15 of this Ruling. 17. All Australian Securities and Investments Commission (ASIC) requirements are, or will be, complied with for the term of the agreements. | Overview: 18. Following is a summary of the scheme: Loan and security arrangements | Assumptions: 19. This Ruling is made on the basis of the following necessary assumptions: Commissioner of Taxation 5 July 2017 | Section 6-5 and section 8-1: 20. The Swap is a bilateral agreement obligating MBL to exchange one or more fixed payments (the Fixed Coupons) at specified intervals in return for a floating payment (the Swap Settlement Amount) ascertained from applying financial prices (for example market indices). The specified underlying amount is a notional principal amount which is not exchanged. 21. The Swap is a financial derivative the value of which is derived from or calculated by reference to the performance of underlying Reference Assets. 22. An Investor's purpose for entering into the Swap can be considered to be to make a profit through speculation (attempting to make a profit by correctly forecasting movements in the market). 23. Under section 6-5 an amount is assessable income if it is income according to ordinary concepts. The case law establishes that a net amount or net profit may constitute income according to ordinary concepts (refer to Commercial and General Acceptance Ltd v. FC of T (1977) 137 CLR 373; 77 ATC 4375; (1977) 7 ATR 716 per Mason J at CLR 382-383; ATC 4380; ATR 721-722, with whom Barwick CJ and Gibbs J agreed). However, a net profit will only be considered income when the gross receipt from which it is calculated itself lacks the character of income. 24. Income is a gain from the carrying on of organised activity directed to the making of gains. In particular, as an Investor's intention or purpose in entering into the Swap is to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary, judged by reference to the Investor's ordinary business ( FC of T v. Myer Emporium Ltd (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693). The gain must be of revenue rather than capital nature in order to constitute income according to ordinary concepts. 25. Applying the same rationale, where an Investor's intention or purpose in entering into the Swap is to make a profit or gain, any net loss generated is incurred in gaining or producing assessable income and shall be deductible under section 8-1. | The gross receipts and payment under the Swap are not on revenue account: 26. The Swap is essentially speculative and undertaken with the object of making a profit with regard to the judicial commentary and accounting and business practice (see Commissioner of Taxes (S.A.) v. Executor Trustee and Agency Co. of South Australia Ltd (1938) 63 CLR 108 ( Carden's case ) per Dixon J at 152-4). 27. The income status of gross receipts received under the Swap is determined from a commercial perspective. An analogy is drawn between swaps and futures contracts which also involve an element of speculation. The gain or loss from futures contracts is generally assessable or deductible, whether those futures contracts are entered into as part of a futures trader's operations or for hedging or speculative purposes. 28. Thus, the judicial analysis of swaps as commercial contracts of speculation entered into with a view to profit would indicate that it is the difference between the receipts and payments under the Swap that is the income (or loss) to the Investor. The gross amounts are reciprocally payable (although not necessarily in the same period) and the difference between those amounts is a gain or a loss, according to the circumstances as dictated by movements in the performance of the underlying Reference Assets. On such an analysis, it is difficult to regard the Swap payment and receipt(s) as expense and income respectively. Rather, they are in the nature of payments and receipts which have the flavour of flows of circulating capital. Only the net gain realised by an Investor on the Swap can properly be regarded as income. Similarly, where the receipt is less than the payment a net loss results. | The timing of income from the Swap: 29. Pursuant to subsection 6-5(2) ordinary income is included in the assessable income of an Investor when it is derived by that Investor. The word 'derived' is not defined under the Income Tax Assessment Act but is equivalent to 'arising or accruing' ( Harding v. FC of T (1917) 23 CLR 119 per Isaacs J at 133). Income is taken to be derived when it has 'come home' to the Investor, that is to say it has been earned and, depending on the nature of the source of the income, there is sufficient certainty as to its being realised ( Carden's case per Dixon J at 155-159). Such certainty is determined by reference to not only legal rights and obligations but also business and commercial realities ( Arthur Murray (NSW) Pty Ltd v. FC of T (1965) 114 CLR 314; 14 ATD 98 at CLR 318-319; ATD 99-100). 30. The time at which an amount represents 'income derived' by an Investor depends on the nature of the income and the circumstances in which it is derived. Further, the accounting method to be used in determining when income is derived depends on its 'actual appropriateness' and in particular on 'whether in the circumstances of the case it is calculated to give a substantially correct reflex of the taxpayer's true income' ( Carden's case per Dixon J at 155). 31. In the case of an Investor in the Swap, the net gain or loss made will be assessed in the period in which it arises. | Subdivision H of Division 3 of Part III of the ITAA 1936: 32. Subdivision H of Division 3 of Part III of the ITAA 1936 (Subdivision H) changes the timing of deductions under section 8-1 of the ITAA 1997 for expenditure meeting the requirements of the Subdivision. Broadly, the effect of Subdivision H is to deny immediate deductions for expenditure subject to the Subdivision and instead to spread the deductions over the period to which the expenditure relates (to a maximum of 10 years). 33. The mechanism by which Subdivision H spreads the deduction is through the application of certain operative provisions, each of which applies in separate circumstances depending on the time at which the expenditure was incurred and the type of expenditure incurred. 34. However, Subdivision H only applies to spread the deduction for an amount of expenditure if the expenditure is, otherwise deductible under section 8-1 of the ITAA 1997 or certain other deduction sections; not 'excluded expenditure' as defined in subsection 82KZL(1) of the ITAA 1936; and incurred for things not to be done wholly within specified periods depending on which operative provision the expenditure falls under. 35. Subdivision H only applies to 'expenditure' that is otherwise deductible. As the gross payment under the Swap is not otherwise deductible to an Investor under section 8-1 of the ITAA 1997, only the net loss is susceptible to the operation of Subdivision H. A loss may not be 'expenditure' as expenditure has to be made, and connotes something which is passing out from the taxpayer ( Gross v. FC of T (1999) 99 ATC 4196; (1999) 42 ATR 205 at ATC 4207; ATR 217). However, even if expenditure were to be acknowledged to include a loss then, as the loss relates to the income year in which it is incurred, there is nothing for Subdivision H to operate with respect to, and thus Subdivision H would not displace when such losses are regarded as deductible. Thus, Subdivision H does not apply to losses arising to an Investor under the Swap. | Division 16E of Part III of the ITAA 1936: 36. Division 16E of Part III of the ITAA 1936 (Division 16E) was enacted to prevent tax deferral opportunities which were available from certain discounted and deferred interest securities. Under Division 16E, the income and deductions from these securities are spread over the term of the security on a basis which reflects the economic gains and losses which have accrued at any point in time. 37. For Division 16E to apply, the transaction must satisfy the definition of 'qualifying security' in subsection 159GP(1) of the ITAA 1936. For the purposes of determining whether the Swap is a qualifying security, the Swap must be a 'security', also defined in subsection 159GP(1) of the ITAA 1936 to mean: 38. The Swap is not considered to have sufficient debt like obligations to be a contract to which paragraph (d) of the definition of security in subsection 159GP(1) of the ITAA 1936 applies, nor does it fall within paragraphs (a), (b) or (c) of that definition. Therefore, the Swap does not meet the definition of security under subsection 159GP(1) of the ITAA 1936 and, as such, is not a qualifying security for the purposes of Division 16E. 39. Accordingly, Division 16E does not apply to the net income or loss amount arising to an Investor under the Swap. | Part IVA - anti-avoidance: 40. 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 Ruling (see paragraphs 15 to 19 of this Ruling), it is accepted that the scheme is an ordinary commercial transaction and Part IVA of the ITAA 1936 will not apply. 41. 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). Not previously issued as a draft

Ruling: This Product Ruling has been given on the basis that the entity(s) who 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 (below) 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 referred to as the Swap, being the Macquarie Torque Swap offered by Macquarie Bank Limited (MBL) as part of the Macquarie Torque Facility (Facility). 3. This Product Ruling does not address: | Class of entities: 4. This part of the Product Ruling specifies which entities: set out in the Ruling section of this Product Ruling. 5. The class of entities that can rely on the Ruling section of this Product Ruling consists of those entities that: These entities are referred to as Investors. 6. The class of entities that can rely on the Ruling section of this Product Ruling does not include entities that: | Qualifications: 7. 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 15 to 19 of this Ruling. 8. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then:


Appendix: Section 6-5 and section 8-1: 20. The Swap is a bilateral agreement obligating MBL to exchange one or more fixed payments (the Fixed Coupons) at specified intervals in return for a floating payment (the Swap Settlement Amount) ascertained from applying financial prices (for example market indices). The specified underlying amount is a notional principal amount which is not exchanged. 21. The Swap is a financial derivative the value of which is derived from or calculated by reference to the performance of underlying Reference Assets. 22. An Investor's purpose for entering into the Swap can be considered to be to make a profit through speculation (attempting to make a profit by correctly forecasting movements in the market). 23. Under section 6-5 an amount is assessable income if it is income according to ordinary concepts. The case law establishes that a net amount or net profit may constitute income according to ordinary concepts (refer to Commercial and General Acceptance Ltd v. FC of T (1977) 137 CLR 373; 77 ATC 4375; (1977) 7 ATR 716 per Mason J at CLR 382-383; ATC 4380; ATR 721-722, with whom Barwick CJ and Gibbs J agreed). However, a net profit will only be considered income when the gross receipt from which it is calculated itself lacks the character of income. 24. Income is a gain from the carrying on of organised activity directed to the making of gains. In particular, as an Investor's intention or purpose in entering into the Swap is to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary, judged by reference to the Investor's ordinary business ( FC of T v. Myer Emporium Ltd (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693). The gain must be of revenue rather than capital nature in order to constitute income according to ordinary concepts. 25. Applying the same rationale, where an Investor's intention or purpose in entering into the Swap is to make a profit or gain, any net loss generated is incurred in gaining or producing assessable income and shall be deductible under section 8-1. | The gross receipts and payment under the Swap are not on revenue account: 26. The Swap is essentially speculative and undertaken with the object of making a profit with regard to the judicial commentary and accounting and business practice (see Commissioner of Taxes (S.A.) v. Executor Trustee and Agency Co. of South Australia Ltd (1938) 63 CLR 108 ( Carden's case ) per Dixon J at 152-4). 27. The income status of gross receipts received under the Swap is determined from a commercial perspective. An analogy is drawn between swaps and futures contracts which also involve an element of speculation. The gain or loss from futures contracts is generally assessable or deductible, whether those futures contracts are entered into as part of a futures trader's operations or for hedging or speculative purposes. 28. Thus, the judicial analysis of swaps as commercial contracts of speculation entered into with a view to profit would indicate that it is the difference between the receipts and payments under the Swap that is the income (or loss) to the Investor. The gross amounts are reciprocally payable (although not necessarily in the same period) and the difference between those amounts is a gain or a loss, according to the circumstances as dictated by movements in the performance of the underlying Reference Assets. On such an analysis, it is difficult to regard the Swap payment and receipt(s) as expense and income respectively. Rather, they are in the nature of payments and receipts which have the flavour of flows of circulating capital. Only the net gain realised by an Investor on the Swap can properly be regarded as income. Similarly, where the receipt is less than the payment a net loss results. | The timing of income from the Swap: 29. Pursuant to subsection 6-5(2) ordinary income is included in the assessable income of an Investor when it is derived by that Investor. The word 'derived' is not defined under the Income Tax Assessment Act but is equivalent to 'arising or accruing' ( Harding v. FC of T (1917) 23 CLR 119 per Isaacs J at 133). Income is taken to be derived when it has 'come home' to the Investor, that is to say it has been earned and, depending on the nature of the source of the income, there is sufficient certainty as to its being realised ( Carden's case per Dixon J at 155-159). Such certainty is determined by reference to not only legal rights and obligations but also business and commercial realities ( Arthur Murray (NSW) Pty Ltd v. FC of T (1965) 114 CLR 314; 14 ATD 98 at CLR 318-319; ATD 99-100). 30. The time at which an amount represents 'income derived' by an Investor depends on the nature of the income and the circumstances in which it is derived. Further, the accounting method to be used in determining when income is derived depends on its 'actual appropriateness' and in particular on 'whether in the circumstances of the case it is calculated to give a substantially correct reflex of the taxpayer's true income' ( Carden's case per Dixon J at 155). 31. In the case of an Investor in the Swap, the net gain or loss made will be assessed in the period in which it arises. | Subdivision H of Division 3 of Part III of the ITAA 1936: 32. Subdivision H of Division 3 of Part III of the ITAA 1936 (Subdivision H) changes the timing of deductions under section 8-1 of the ITAA 1997 for expenditure meeting the requirements of the Subdivision. Broadly, the effect of Subdivision H is to deny immediate deductions for expenditure subject to the Subdivision and instead to spread the deductions over the period to which the expenditure relates (to a maximum of 10 years). 33. The mechanism by which Subdivision H spreads the deduction is through the application of certain operative provisions, each of which applies in separate circumstances depending on the time at which the expenditure was incurred and the type of expenditure incurred. 34. However, Subdivision H only applies to spread the deduction for an amount of expenditure if the expenditure is, otherwise deductible under section 8-1 of the ITAA 1997 or certain other deduction sections; not 'excluded expenditure' as defined in subsection 82KZL(1) of the ITAA 1936; and incurred for things not to be done wholly within specified periods depending on which operative provision the expenditure falls under. 35. Subdivision H only applies to 'expenditure' that is otherwise deductible. As the gross payment under the Swap is not otherwise deductible to an Investor under section 8-1 of the ITAA 1997, only the net loss is susceptible to the operation of Subdivision H. A loss may not be 'expenditure' as expenditure has to be made, and connotes something which is passing out from the taxpayer ( Gross v. FC of T (1999) 99 ATC 4196; (1999) 42 ATR 205 at ATC 4207; ATR 217). However, even if expenditure were to be acknowledged to include a loss then, as the loss relates to the income year in which it is incurred, there is nothing for Subdivision H to operate with respect to, and thus Subdivision H would not displace when such losses are regarded as deductible. Thus, Subdivision H does not apply to losses arising to an Investor under the Swap. | Division 16E of Part III of the ITAA 1936: 36. Division 16E of Part III of the ITAA 1936 (Division 16E) was enacted to prevent tax deferral opportunities which were available from certain discounted and deferred interest securities. Under Division 16E, the income and deductions from these securities are spread over the term of the security on a basis which reflects the economic gains and losses which have accrued at any point in time. 37. For Division 16E to apply, the transaction must satisfy the definition of 'qualifying security' in subsection 159GP(1) of the ITAA 1936. For the purposes of determining whether the Swap is a qualifying security, the Swap must be a 'security', also defined in subsection 159GP(1) of the ITAA 1936 to mean: 38. The Swap is not considered to have sufficient debt like obligations to be a contract to which paragraph (d) of the definition of security in subsection 159GP(1) of the ITAA 1936 applies, nor does it fall within paragraphs (a), (b) or (c) of that definition. Therefore, the Swap does not meet the definition of security under subsection 159GP(1) of the ITAA 1936 and, as such, is not a qualifying security for the purposes of Division 16E. 39. Accordingly, Division 16E does not apply to the net income or loss amount arising to an Investor under the Swap. | Part IVA - anti-avoidance: 40. 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 Ruling (see paragraphs 15 to 19 of this Ruling), it is accepted that the scheme is an ordinary commercial transaction and 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


Legislative references: ITAA 1936 ITAA 1936 Pt III Div 3 Subdiv H ITAA 1936 82KZL(1) ITAA 1936 Pt III Div 16E ITAA 1936 159GP(1) ITAA 1936 Pt IVA ITAA 1997 ITAA 1997 6-5 ITAA 1997 6-5(2) ITAA 1997 8-1 ITAA 1997 Div 230 ITAA 1997 230-455(7) TAA 1953
Case references: Arthur Murray (NSW) Pty Ltd v. Federal Commissioner of Taxation (1965) 114 CLR 314 (1965) 39 ALJR 262 (1965) 14 ATD 98 [1965] HCA 58