Product Ruling PR 2009/32
Date of effect: 13 May 2009

What this ruling is about: 1. This Product Ruling sets out the Commissioner's opinion on the way in which the relevant provision(s) identified in the Ruling section (below) apply to the defined class of entities, who take part in the scheme to which this Ruling relates. 2. In this Ruling the scheme is the investment in a Macquarie Fusion Fund using a full recourse loan (Investment Loan) made by Macquarie Bank Ltd (the Bank); a further borrowing from the Bank, if it occurs, used to fund the payment of interest and the payment of a put option (Interest and Put Protection Fee Loan) and the grant of a put option (Put Option) by the Bank. The Investment Loan and Interest and Put Protection Fee Loan are in the form of the Loan and Security Agreement contained in Appendix C of the Product Disclosure Statement (PDS) that forms part of the Scheme. 3. This Ruling does not deal with the tax consequences of: Class of entities 4. The class of entities who can rely on this Product Ruling consists of those entities that are accepted to participate in the scheme specified below on or after the date this Product Ruling is published and which execute relevant Agreements mentioned in paragraph 17 of this Ruling on or before 30 June 2009. They must have a purpose of staying in the scheme until it is completed (that is being a party to the relevant agreements until their term expires), and deriving assessable income from this involvement. These entities are referred to as Investor/s. Superannuation Industry (Supervision) Act 1993 5. 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 6. 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 17 to 21 of this Ruling. 7. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then: 8. This work is copyright. Apart from any use as permitted under the Copyright Act 1968 , no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to:

Class of entities or scheme: 4. The class of entities who can rely on this Product Ruling consists of those entities that are accepted to participate in the scheme specified below on or after the date this Product Ruling is published and which execute relevant Agreements mentioned in paragraph 17 of this Ruling on or before 30 June 2009. They must have a purpose of staying in the scheme until it is completed (that is being a party to the relevant agreements until their term expires), and deriving assessable income from this involvement. These entities are referred to as Investor/s. | Superannuation Industry (Supervision) Act 1993: 5. 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: 6. 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 17 to 21 of this Ruling. 7. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then: 8. This work is copyright. Apart from any use as permitted under the Copyright Act 1968 , no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to: 9. This Product Ruling applies prospectively from 13 May 2009, the date it is published. It therefore applies only to the specified class of entities that enter into the scheme from 1 June 2009 until 30 June 2009 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. 13. [Omitted.] 14. [Omitted.] | Note to promoters and advisers: 15. 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. | Application of this Ruling: 16. Subject to paragraph 3 and the assumptions in paragraph 21 of this Ruling: 17. 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. 18. The documents listed in paragraph 17 of this Ruling are those that will govern the scheme that an Investor will enter into. For the purposes of describing the scheme to which this Product 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. The effect of these agreements is summarised as follows. 19. All Australian Securities and Investment Commission (ASIC) and Corporations Act 2001 requirements are, or will be, complied with for the term of the agreements. | Overview: 20. Following is a summary of the scheme: | Assumptions: 21. This Ruling is made on the basis of the following necessary assumptions: Commissioner of Taxation 13 May 2009 | Section 8-1 and Division 247: 22. 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 of the ITAA 1997 where it is expected that assessable income would be derived from the investment (see Taxation Ruling TR 95/33 which relates to subsection 51(1) of the ITAA 1936 which was the predecessor of section 8-1 of the ITAA 1997). Interest on an Investor's Investment Loan and, if applicable, the part of the interest incurred on the Interest and Put Protection Fee Loan that is used to pay interest on the Investment Loan, will be deductible under section 8-1 of the ITAA 1997. The Put Option Interest, being part of the interest on the Interest and Put Protection Fee Loan that corresponds to the part of the loan that is used to pay the Protection Fee, is not deductible under section 8-1. 23. Division 247 of the ITAA 1997 applies to the scheme as it is a capital protected borrowing (CPB). The Investor uses the Investment Loan to acquire an investment in the Fusion Fund and the Investor is wholly or partly protected against a fall in the market value of the investment. The investment in the Fusion Fund represents beneficial interests in unit trusts. 24. Division 247 of the ITAA 1997 sets out a methodology for reasonably attributing the cost of capital protection incurred by a borrower under a CPB (section 247-20 of the ITAA 1997). Division 247 ignores any amount which is not in substance for capital protection or interest, in calculating the cost of capital protection (subsection 247-20(3) of the ITAA 1997). 25. Where a borrower enters into an Investment Loan, the amount reasonably attributable to capital protection, is worked out under the method statement in subsection 247-20(3) of the ITAA 1997, as set out in paragraph 16(b) of this Ruling. 26. Under step 1 of the method statement, the Total Amount incurred by the Investor under or in respect of the CPB for the income year includes the Protection Fee and interest incurred on the Investment Loan for the income year. 27. Where the Total Amount incurred by the Investor worked out under step 1 of the method statement is less than the total interest that would have been incurred by the Investor worked out under step 2 of the method statement, there is no amount reasonably attributable to the cost of capital protection. In these circumstances, the interest on the Investment Loan will be deductible. 28. Where the Total Amount incurred by the Investor is greater than the total interest that would have been incurred by the Investor worked out under step 2 of the method statement, the Excess Amount is reasonably attributable to the cost of capital protection. In calculating the total cost of the Put Option, the Excess Amount will be reduced by any actual payment for the Put Option (the Protection Fee) in accordance with subsection 247-20(6) of the ITAA 1997 (Additional Amount). The Additional Amount, to the extent that it is greater than zero, constitutes a further cost of capital protection in addition to the Protection Fee for the Put Option. The Put Option is a capital asset for an Investor in the Fusion Fund. Therefore, the sum of the Protection Fee and Additional Amount (if any) is capital in nature and not deductible under section 8-1 of the ITAA 1997. 28A. There is no element of capital protection connected with the Interest and Put Protection Fee Loan. No part of the interest incurred by the Investor on the Interest and Put Protection Fee Loan for the income year will therefore be attributable to the cost of capital protection. | Section 51AAA: 29. Under the scheme, it is contemplated that over the period of an Investor's involvement there will be assessable income derived by way of distributions of the net income of a Fund and net capital gains. As the Total Amount, to the extent that it is not reasonably attributable to the cost of capital protection, and the part of the interest incurred on the Interest and Put Protection Fee Loan that is used to pay interest on the Investment Loan will be deductible under section 8-1 of the ITAA 1997, notwithstanding the inclusion of a net capital gain in assessable income, section 51AAA of the ITAA 1936 has no application to an Investor. | Section 82KL: 30. The operation of section 82KL of the ITAA 1936 depends, among other things, on the identification of a certain quantum of 'additional benefit(s)'. Insufficient 'additional benefits' will be provided to trigger the application of section 82KL of the ITAA 1936. It will not apply to deny the deductions otherwise allowable under section 8-1 of the ITAA 1997. | Subdivision H of Division 3 of Part III: 31. Subdivision H of Division 3 of Part III of the ITAA 1936 (Subdivision H) deals with the timing of deductions for certain advance expenditure incurred under an agreement in return for the doing of a thing under that agreement that will not be wholly done within the same year of income. Separate rules apply depending on whether the expenditure is incurred in carrying on a business, whether the Investor is a 'small business entity', whether the Investor is an individual and whether the Investor is not an individual and incurs the expenditure otherwise than in carrying on a business. This Subdivision does not apply to 'excluded expenditure', which is defined in subsection 82KZL(1) of the ITAA 1936 to include amounts of less than $1,000 or amounts of expenditure that are of a capital nature. | Subdivision 328-C - small business entities: 32. Under section 328-110 of the ITAA 1997, an Investor carrying on a business in an income year will be a small business entity for that year (the current year) if: | The eligible service period for the purposes of Subdivision H: 33. The prepaid interest charges on the Investment Loan allowable under section 8-1 of the ITAA 1997 are in relation to a prepayment of loan interest for a period that is 12 months or less. Paragraph 82KZL(2)(a) of the ITAA 1936 provides that a payment of interest that is made in return for the making available of a loan principal is to be taken, for the purposes of Subdivision H, to be expenditure incurred under an agreement in return for the doing of a thing under the agreement for the period to which the interest payment relates. The eligible service period in relation to a payment of loan interest is determined by reference to the period to which the interest relates, which is 12 months, and not to the period of the loan. | Sections 82KZME and 82KZMF - prepaid expenditure and tax shelter arrangements: 34. The rules in sections 82KZME and 82KZMF of the ITAA 1936 apply, subject to the exceptions in section 82KZME, where expenditure is incurred in relation to a 'tax shelter' arrangement for the doing of a thing that is not to be wholly done within the expenditure year. 35. For the purposes of section 82KZME of the ITAA 1936, 'agreements' are broadly defined to include an entire arrangement of which a contract may form part. Under subsection 82KZME(4) of the ITAA 1936, the relevant 'agreement' is all the contractual arrangements and activities associated with the participation in a Fund, including the financing and management arrangements. 36. Exception 1, as contained in subsection 82KZME(5) of the ITAA 1936, applies to exclude the interest allowable under section 8-1 of the ITAA 1997 incurred on borrowings under the Investment Loan, from the operation of section 82KZMF of the ITAA 1936 as: 37. Deductibility of expenditure must therefore be considered under the prepayment rules outlined in paragraphs 38 to 43 of this Ruling. | Section 82KZM - prepaid expenditure incurred by small business entities and individuals incurring non-business expenditure: 38. Section 82KZM of the ITAA 1936 operates to spread over more than one income year a deduction for prepaid expenditure incurred by a taxpayer that is either: 39. The expenditure must not be excluded expenditure and must be incurred otherwise than in carrying on a business. Section 82KZM of the ITAA 1936 applies if the eligible service period for the expenditure is longer than 12 months, or the eligible service period for the expenditure is 12 months or shorter but ends after the last day of the year of income after the one in which the expenditure was incurred and the expenditure would otherwise be immediately deductible under section 8-1 of the ITAA 1997. 40. As the eligible service period in relation to a deductible interest payment under an Investment Loan is not longer than 12 months and does not end after the last day of the year of income after the one in which the expenditure was incurred, section 82KZM of the ITAA 1936 will have no application to Investors who are small business entities for the year of income, or to Investors who are individuals and the expenditure is not incurred in carrying on a business. Investors who satisfy these tests will be able to claim an immediate deduction for the interest allowable under section 8-1 of the ITAA 1997 incurred under an Investment Loan. | Sections 82KZMA and 82KZMD - prepaid non-business expenditure incurred by non-individuals and non-small business entities: 41. Sections 82KZMA and 82KZMD of the ITAA 1936 set the amount and timing of deductions for expenditure for a taxpayer (other than a small business entity for the year of income that has not chosen to apply section 82KZMD to the expenditure) that is not an individual and does not incur the expenditure in carrying on a business. 42. The expenditure must not be excluded expenditure and must be incurred in return for the doing of a thing under an agreement that is not wholly done within the expenditure year. 43. For these Investors, the deduction for prepaid interest on the Investment Loan will be apportioned over the relevant interest payment period. | Section 110-25 and Division 134 - cost base of the Put Option: 44. If there is an Excess Amount under the method statement in subsection 247-20(3) of the ITAA 1997 and at the Exercise Date the Investor exercises the Put Option, any capital gain or capital loss on exercise of the Put Option is disregarded (section 134-1(4) of the ITAA 1997). The Investor's cost base and the reduced cost base for the units in the Fund will include the Protection Fee, the Put Option Interest and the Additional Amount (if any) which is taken to have been incurred by the Investor to acquire the Put Option (subsection 134-1(1) of the ITAA 1997, item 2). 45. If there is an Excess Amount under the method statement in subsection 247-20(3) of the ITAA 1997 and the Investor does not exercise the Put Option at the Exercise Date, the Put Option will expire (subsection 247-30(2) of the ITAA 1997). The Protection Fee, Put Option Interest and the Additional Amount (if any) will form part of the cost base (under section 110-25 of the ITAA 1997) and the reduced cost base (under section 110-55 of the ITAA 1997) of the Put Option. Where the Put Option expires CGT Event C2 will arise (paragraph 104-25(1)(c) of the ITAA 1997). The capital proceeds on the lapsing Put Option will be nil, therefore the capital loss will be equal to the reduced cost base of the Put Option. | Section 25-25 - Loan Establishment Fee: 46. The Loan Establishment Fee, if applicable, incurred by an Investor upon successful application for an Investment Loan will be an allowable deduction pursuant to section 25-25 of the ITAA 1997. The Loan Establishment Fee will be deductible on a straight line basis over the period of 5 years. | Part IVA: 47. Provided that the scheme ruled on is entered into and carried out as described (see paragraphs 17 to 21 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. 48. The following is a detailed contents list for this Ruling: Not previously issued as a draft

Ruling: 16. Subject to paragraph 3 and the assumptions in paragraph 21 of this Ruling: 17. 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. 18. The documents listed in paragraph 17 of this Ruling are those that will govern the scheme that an Investor will enter into. For the purposes of describing the scheme to which this Product 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. The effect of these agreements is summarised as follows. 19. All Australian Securities and Investment Commission (ASIC) and Corporations Act 2001 requirements are, or will be, complied with for the term of the agreements. | Overview: 20. Following is a summary of the scheme: | Assumptions: 21. This Ruling is made on the basis of the following necessary assumptions: Commissioner of Taxation 13 May 2009 | Section 8-1 and Division 247: 22. 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 of the ITAA 1997 where it is expected that assessable income would be derived from the investment (see Taxation Ruling TR 95/33 which relates to subsection 51(1) of the ITAA 1936 which was the predecessor of section 8-1 of the ITAA 1997). Interest on an Investor's Investment Loan and, if applicable, the part of the interest incurred on the Interest and Put Protection Fee Loan that is used to pay interest on the Investment Loan, will be deductible under section 8-1 of the ITAA 1997. The Put Option Interest, being part of the interest on the Interest and Put Protection Fee Loan that corresponds to the part of the loan that is used to pay the Protection Fee, is not deductible under section 8-1. 23. Division 247 of the ITAA 1997 applies to the scheme as it is a capital protected borrowing (CPB). The Investor uses the Investment Loan to acquire an investment in the Fusion Fund and the Investor is wholly or partly protected against a fall in the market value of the investment. The investment in the Fusion Fund represents beneficial interests in unit trusts. 24. Division 247 of the ITAA 1997 sets out a methodology for reasonably attributing the cost of capital protection incurred by a borrower under a CPB (section 247-20 of the ITAA 1997). Division 247 ignores any amount which is not in substance for capital protection or interest, in calculating the cost of capital protection (subsection 247-20(3) of the ITAA 1997). 25. Where a borrower enters into an Investment Loan, the amount reasonably attributable to capital protection, is worked out under the method statement in subsection 247-20(3) of the ITAA 1997, as set out in paragraph 16(b) of this Ruling. 26. Under step 1 of the method statement, the Total Amount incurred by the Investor under or in respect of the CPB for the income year includes the Protection Fee and interest incurred on the Investment Loan for the income year. 27. Where the Total Amount incurred by the Investor worked out under step 1 of the method statement is less than the total interest that would have been incurred by the Investor worked out under step 2 of the method statement, there is no amount reasonably attributable to the cost of capital protection. In these circumstances, the interest on the Investment Loan will be deductible. 28. Where the Total Amount incurred by the Investor is greater than the total interest that would have been incurred by the Investor worked out under step 2 of the method statement, the Excess Amount is reasonably attributable to the cost of capital protection. In calculating the total cost of the Put Option, the Excess Amount will be reduced by any actual payment for the Put Option (the Protection Fee) in accordance with subsection 247-20(6) of the ITAA 1997 (Additional Amount). The Additional Amount, to the extent that it is greater than zero, constitutes a further cost of capital protection in addition to the Protection Fee for the Put Option. The Put Option is a capital asset for an Investor in the Fusion Fund. Therefore, the sum of the Protection Fee and Additional Amount (if any) is capital in nature and not deductible under section 8-1 of the ITAA 1997. 28A. There is no element of capital protection connected with the Interest and Put Protection Fee Loan. No part of the interest incurred by the Investor on the Interest and Put Protection Fee Loan for the income year will therefore be attributable to the cost of capital protection. | Section 51AAA: 29. Under the scheme, it is contemplated that over the period of an Investor's involvement there will be assessable income derived by way of distributions of the net income of a Fund and net capital gains. As the Total Amount, to the extent that it is not reasonably attributable to the cost of capital protection, and the part of the interest incurred on the Interest and Put Protection Fee Loan that is used to pay interest on the Investment Loan will be deductible under section 8-1 of the ITAA 1997, notwithstanding the inclusion of a net capital gain in assessable income, section 51AAA of the ITAA 1936 has no application to an Investor. | Section 82KL: 30. The operation of section 82KL of the ITAA 1936 depends, among other things, on the identification of a certain quantum of 'additional benefit(s)'. Insufficient 'additional benefits' will be provided to trigger the application of section 82KL of the ITAA 1936. It will not apply to deny the deductions otherwise allowable under section 8-1 of the ITAA 1997. | Subdivision H of Division 3 of Part III: 31. Subdivision H of Division 3 of Part III of the ITAA 1936 (Subdivision H) deals with the timing of deductions for certain advance expenditure incurred under an agreement in return for the doing of a thing under that agreement that will not be wholly done within the same year of income. Separate rules apply depending on whether the expenditure is incurred in carrying on a business, whether the Investor is a 'small business entity', whether the Investor is an individual and whether the Investor is not an individual and incurs the expenditure otherwise than in carrying on a business. This Subdivision does not apply to 'excluded expenditure', which is defined in subsection 82KZL(1) of the ITAA 1936 to include amounts of less than $1,000 or amounts of expenditure that are of a capital nature. | Subdivision 328-C - small business entities: 32. Under section 328-110 of the ITAA 1997, an Investor carrying on a business in an income year will be a small business entity for that year (the current year) if: | The eligible service period for the purposes of Subdivision H: 33. The prepaid interest charges on the Investment Loan allowable under section 8-1 of the ITAA 1997 are in relation to a prepayment of loan interest for a period that is 12 months or less. Paragraph 82KZL(2)(a) of the ITAA 1936 provides that a payment of interest that is made in return for the making available of a loan principal is to be taken, for the purposes of Subdivision H, to be expenditure incurred under an agreement in return for the doing of a thing under the agreement for the period to which the interest payment relates. The eligible service period in relation to a payment of loan interest is determined by reference to the period to which the interest relates, which is 12 months, and not to the period of the loan. | Sections 82KZME and 82KZMF - prepaid expenditure and tax shelter arrangements: 34. The rules in sections 82KZME and 82KZMF of the ITAA 1936 apply, subject to the exceptions in section 82KZME, where expenditure is incurred in relation to a 'tax shelter' arrangement for the doing of a thing that is not to be wholly done within the expenditure year. 35. For the purposes of section 82KZME of the ITAA 1936, 'agreements' are broadly defined to include an entire arrangement of which a contract may form part. Under subsection 82KZME(4) of the ITAA 1936, the relevant 'agreement' is all the contractual arrangements and activities associated with the participation in a Fund, including the financing and management arrangements. 36. Exception 1, as contained in subsection 82KZME(5) of the ITAA 1936, applies to exclude the interest allowable under section 8-1 of the ITAA 1997 incurred on borrowings under the Investment Loan, from the operation of section 82KZMF of the ITAA 1936 as: 37. Deductibility of expenditure must therefore be considered under the prepayment rules outlined in paragraphs 38 to 43 of this Ruling. | Section 82KZM - prepaid expenditure incurred by small business entities and individuals incurring non-business expenditure: 38. Section 82KZM of the ITAA 1936 operates to spread over more than one income year a deduction for prepaid expenditure incurred by a taxpayer that is either: 39. The expenditure must not be excluded expenditure and must be incurred otherwise than in carrying on a business. Section 82KZM of the ITAA 1936 applies if the eligible service period for the expenditure is longer than 12 months, or the eligible service period for the expenditure is 12 months or shorter but ends after the last day of the year of income after the one in which the expenditure was incurred and the expenditure would otherwise be immediately deductible under section 8-1 of the ITAA 1997. 40. As the eligible service period in relation to a deductible interest payment under an Investment Loan is not longer than 12 months and does not end after the last day of the year of income after the one in which the expenditure was incurred, section 82KZM of the ITAA 1936 will have no application to Investors who are small business entities for the year of income, or to Investors who are individuals and the expenditure is not incurred in carrying on a business. Investors who satisfy these tests will be able to claim an immediate deduction for the interest allowable under section 8-1 of the ITAA 1997 incurred under an Investment Loan. | Sections 82KZMA and 82KZMD - prepaid non-business expenditure incurred by non-individuals and non-small business entities: 41. Sections 82KZMA and 82KZMD of the ITAA 1936 set the amount and timing of deductions for expenditure for a taxpayer (other than a small business entity for the year of income that has not chosen to apply section 82KZMD to the expenditure) that is not an individual and does not incur the expenditure in carrying on a business. 42. The expenditure must not be excluded expenditure and must be incurred in return for the doing of a thing under an agreement that is not wholly done within the expenditure year. 43. For these Investors, the deduction for prepaid interest on the Investment Loan will be apportioned over the relevant interest payment period. | Section 110-25 and Division 134 - cost base of the Put Option: 44. If there is an Excess Amount under the method statement in subsection 247-20(3) of the ITAA 1997 and at the Exercise Date the Investor exercises the Put Option, any capital gain or capital loss on exercise of the Put Option is disregarded (section 134-1(4) of the ITAA 1997). The Investor's cost base and the reduced cost base for the units in the Fund will include the Protection Fee, the Put Option Interest and the Additional Amount (if any) which is taken to have been incurred by the Investor to acquire the Put Option (subsection 134-1(1) of the ITAA 1997, item 2). 45. If there is an Excess Amount under the method statement in subsection 247-20(3) of the ITAA 1997 and the Investor does not exercise the Put Option at the Exercise Date, the Put Option will expire (subsection 247-30(2) of the ITAA 1997). The Protection Fee, Put Option Interest and the Additional Amount (if any) will form part of the cost base (under section 110-25 of the ITAA 1997) and the reduced cost base (under section 110-55 of the ITAA 1997) of the Put Option. Where the Put Option expires CGT Event C2 will arise (paragraph 104-25(1)(c) of the ITAA 1997). The capital proceeds on the lapsing Put Option will be nil, therefore the capital loss will be equal to the reduced cost base of the Put Option. | Section 25-25 - Loan Establishment Fee: 46. The Loan Establishment Fee, if applicable, incurred by an Investor upon successful application for an Investment Loan will be an allowable deduction pursuant to section 25-25 of the ITAA 1997. The Loan Establishment Fee will be deductible on a straight line basis over the period of 5 years. | Part IVA: 47. Provided that the scheme ruled on is entered into and carried out as described (see paragraphs 17 to 21 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. 48. The following is a detailed contents list for this Ruling: Not previously issued as a draft


Appendix: Section 8-1 and Division 247: 22. 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 of the ITAA 1997 where it is expected that assessable income would be derived from the investment (see Taxation Ruling TR 95/33 which relates to subsection 51(1) of the ITAA 1936 which was the predecessor of section 8-1 of the ITAA 1997). Interest on an Investor's Investment Loan and, if applicable, the part of the interest incurred on the Interest and Put Protection Fee Loan that is used to pay interest on the Investment Loan, will be deductible under section 8-1 of the ITAA 1997. The Put Option Interest, being part of the interest on the Interest and Put Protection Fee Loan that corresponds to the part of the loan that is used to pay the Protection Fee, is not deductible under section 8-1. 23. Division 247 of the ITAA 1997 applies to the scheme as it is a capital protected borrowing (CPB). The Investor uses the Investment Loan to acquire an investment in the Fusion Fund and the Investor is wholly or partly protected against a fall in the market value of the investment. The investment in the Fusion Fund represents beneficial interests in unit trusts. 24. Division 247 of the ITAA 1997 sets out a methodology for reasonably attributing the cost of capital protection incurred by a borrower under a CPB (section 247-20 of the ITAA 1997). Division 247 ignores any amount which is not in substance for capital protection or interest, in calculating the cost of capital protection (subsection 247-20(3) of the ITAA 1997). 25. Where a borrower enters into an Investment Loan, the amount reasonably attributable to capital protection, is worked out under the method statement in subsection 247-20(3) of the ITAA 1997, as set out in paragraph 16(b) of this Ruling. 26. Under step 1 of the method statement, the Total Amount incurred by the Investor under or in respect of the CPB for the income year includes the Protection Fee and interest incurred on the Investment Loan for the income year. 27. Where the Total Amount incurred by the Investor worked out under step 1 of the method statement is less than the total interest that would have been incurred by the Investor worked out under step 2 of the method statement, there is no amount reasonably attributable to the cost of capital protection. In these circumstances, the interest on the Investment Loan will be deductible. 28. Where the Total Amount incurred by the Investor is greater than the total interest that would have been incurred by the Investor worked out under step 2 of the method statement, the Excess Amount is reasonably attributable to the cost of capital protection. In calculating the total cost of the Put Option, the Excess Amount will be reduced by any actual payment for the Put Option (the Protection Fee) in accordance with subsection 247-20(6) of the ITAA 1997 (Additional Amount). The Additional Amount, to the extent that it is greater than zero, constitutes a further cost of capital protection in addition to the Protection Fee for the Put Option. The Put Option is a capital asset for an Investor in the Fusion Fund. Therefore, the sum of the Protection Fee and Additional Amount (if any) is capital in nature and not deductible under section 8-1 of the ITAA 1997. 28A. There is no element of capital protection connected with the Interest and Put Protection Fee Loan. No part of the interest incurred by the Investor on the Interest and Put Protection Fee Loan for the income year will therefore be attributable to the cost of capital protection. | Section 51AAA: 29. Under the scheme, it is contemplated that over the period of an Investor's involvement there will be assessable income derived by way of distributions of the net income of a Fund and net capital gains. As the Total Amount, to the extent that it is not reasonably attributable to the cost of capital protection, and the part of the interest incurred on the Interest and Put Protection Fee Loan that is used to pay interest on the Investment Loan will be deductible under section 8-1 of the ITAA 1997, notwithstanding the inclusion of a net capital gain in assessable income, section 51AAA of the ITAA 1936 has no application to an Investor. | Section 82KL: 30. The operation of section 82KL of the ITAA 1936 depends, among other things, on the identification of a certain quantum of 'additional benefit(s)'. Insufficient 'additional benefits' will be provided to trigger the application of section 82KL of the ITAA 1936. It will not apply to deny the deductions otherwise allowable under section 8-1 of the ITAA 1997. | Subdivision H of Division 3 of Part III: 31. Subdivision H of Division 3 of Part III of the ITAA 1936 (Subdivision H) deals with the timing of deductions for certain advance expenditure incurred under an agreement in return for the doing of a thing under that agreement that will not be wholly done within the same year of income. Separate rules apply depending on whether the expenditure is incurred in carrying on a business, whether the Investor is a 'small business entity', whether the Investor is an individual and whether the Investor is not an individual and incurs the expenditure otherwise than in carrying on a business. This Subdivision does not apply to 'excluded expenditure', which is defined in subsection 82KZL(1) of the ITAA 1936 to include amounts of less than $1,000 or amounts of expenditure that are of a capital nature. | Subdivision 328-C - small business entities: 32. Under section 328-110 of the ITAA 1997, an Investor carrying on a business in an income year will be a small business entity for that year (the current year) if: | The eligible service period for the purposes of Subdivision H: 33. The prepaid interest charges on the Investment Loan allowable under section 8-1 of the ITAA 1997 are in relation to a prepayment of loan interest for a period that is 12 months or less. Paragraph 82KZL(2)(a) of the ITAA 1936 provides that a payment of interest that is made in return for the making available of a loan principal is to be taken, for the purposes of Subdivision H, to be expenditure incurred under an agreement in return for the doing of a thing under the agreement for the period to which the interest payment relates. The eligible service period in relation to a payment of loan interest is determined by reference to the period to which the interest relates, which is 12 months, and not to the period of the loan. | Sections 82KZME and 82KZMF - prepaid expenditure and tax shelter arrangements: 34. The rules in sections 82KZME and 82KZMF of the ITAA 1936 apply, subject to the exceptions in section 82KZME, where expenditure is incurred in relation to a 'tax shelter' arrangement for the doing of a thing that is not to be wholly done within the expenditure year. 35. For the purposes of section 82KZME of the ITAA 1936, 'agreements' are broadly defined to include an entire arrangement of which a contract may form part. Under subsection 82KZME(4) of the ITAA 1936, the relevant 'agreement' is all the contractual arrangements and activities associated with the participation in a Fund, including the financing and management arrangements. 36. Exception 1, as contained in subsection 82KZME(5) of the ITAA 1936, applies to exclude the interest allowable under section 8-1 of the ITAA 1997 incurred on borrowings under the Investment Loan, from the operation of section 82KZMF of the ITAA 1936 as: 37. Deductibility of expenditure must therefore be considered under the prepayment rules outlined in paragraphs 38 to 43 of this Ruling. | Section 82KZM - prepaid expenditure incurred by small business entities and individuals incurring non-business expenditure: 38. Section 82KZM of the ITAA 1936 operates to spread over more than one income year a deduction for prepaid expenditure incurred by a taxpayer that is either: 39. The expenditure must not be excluded expenditure and must be incurred otherwise than in carrying on a business. Section 82KZM of the ITAA 1936 applies if the eligible service period for the expenditure is longer than 12 months, or the eligible service period for the expenditure is 12 months or shorter but ends after the last day of the year of income after the one in which the expenditure was incurred and the expenditure would otherwise be immediately deductible under section 8-1 of the ITAA 1997. 40. As the eligible service period in relation to a deductible interest payment under an Investment Loan is not longer than 12 months and does not end after the last day of the year of income after the one in which the expenditure was incurred, section 82KZM of the ITAA 1936 will have no application to Investors who are small business entities for the year of income, or to Investors who are individuals and the expenditure is not incurred in carrying on a business. Investors who satisfy these tests will be able to claim an immediate deduction for the interest allowable under section 8-1 of the ITAA 1997 incurred under an Investment Loan. | Sections 82KZMA and 82KZMD - prepaid non-business expenditure incurred by non-individuals and non-small business entities: 41. Sections 82KZMA and 82KZMD of the ITAA 1936 set the amount and timing of deductions for expenditure for a taxpayer (other than a small business entity for the year of income that has not chosen to apply section 82KZMD to the expenditure) that is not an individual and does not incur the expenditure in carrying on a business. 42. The expenditure must not be excluded expenditure and must be incurred in return for the doing of a thing under an agreement that is not wholly done within the expenditure year. 43. For these Investors, the deduction for prepaid interest on the Investment Loan will be apportioned over the relevant interest payment period. | Section 110-25 and Division 134 - cost base of the Put Option: 44. If there is an Excess Amount under the method statement in subsection 247-20(3) of the ITAA 1997 and at the Exercise Date the Investor exercises the Put Option, any capital gain or capital loss on exercise of the Put Option is disregarded (section 134-1(4) of the ITAA 1997). The Investor's cost base and the reduced cost base for the units in the Fund will include the Protection Fee, the Put Option Interest and the Additional Amount (if any) which is taken to have been incurred by the Investor to acquire the Put Option (subsection 134-1(1) of the ITAA 1997, item 2). 45. If there is an Excess Amount under the method statement in subsection 247-20(3) of the ITAA 1997 and the Investor does not exercise the Put Option at the Exercise Date, the Put Option will expire (subsection 247-30(2) of the ITAA 1997). The Protection Fee, Put Option Interest and the Additional Amount (if any) will form part of the cost base (under section 110-25 of the ITAA 1997) and the reduced cost base (under section 110-55 of the ITAA 1997) of the Put Option. Where the Put Option expires CGT Event C2 will arise (paragraph 104-25(1)(c) of the ITAA 1997). The capital proceeds on the lapsing Put Option will be nil, therefore the capital loss will be equal to the reduced cost base of the Put Option. | Section 25-25 - Loan Establishment Fee: 46. The Loan Establishment Fee, if applicable, incurred by an Investor upon successful application for an Investment Loan will be an allowable deduction pursuant to section 25-25 of the ITAA 1997. The Loan Establishment Fee will be deductible on a straight line basis over the period of 5 years. | Part IVA: 47. Provided that the scheme ruled on is entered into and carried out as described (see paragraphs 17 to 21 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. | [ Note: This is a consolidated version of this document. Refer to the Legal Database (http://law.ato.gov.au) to check its currency and to view the details of all changes.] | 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
Legislative references: ITAA 1936 51(1) ITAA 1936 51AAA ITAA 1936 82KL ITAA 1936 82KZL(1) ITAA 1936 82KZL(2)(a) ITAA 1936 82KZM ITAA 1936 82KZMA ITAA 1936 82KZMD ITAA 1936 82KZME ITAA 1936 82KZME(4) ITAA 1936 82KZME(5) ITAA 1936 82KZME(5)(b)(iii) ITAA 1936 82KZMF ITAA 1936 Pt III Div 3 Subdiv H ITAA 1936 Pt IVA ITAA 1997 8-1 ITAA 1997 25-25 ITAA 1997 104-25 ITAA 1997 104-25(1)(c) ITAA 1997 110-25 ITAA 1997 110-55 ITAA 1997 Div 134 ITAA 1997 134-1 ITAA 1997 134-1(1) ITAA 1997 134-1(4) ITAA 1997 Div 247 ITAA 1997 247-20 ITAA 1997 247-20(3) ITAA 1997 247-20(4) ITAA 1997 247-20(5) ITAA 1997 247-20(5A) ITAA 1997 247-20(6) ITAA 1997 247-30(2) ITAA 1997 Subdiv 328-C ITAA 1997 328-110 ITAA 1997 328-110(1) TAA 1953 Copyright Act 1968 SISA 1993 Corporations Act 2001
Subject references: capital protected borrowing financial products interest expense interest income prepaid expenses product rulings public rulings taxation administration