Product Ruling PR 2011/5
Date of effect: 9 March 2011

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. 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 Macquarie Geared Equities Investment plus (GEI plus) which is a loan offered by Macquarie Bank Limited (the Bank) to acquire a selection of securities, including securities listed on the Australian Securities Exchange and units in registered managed investment schemes (GEI Securities) under the GEI plus Product Brochure 2011 dated 2 March 2011 (Product Brochure). 3. This Ruling does not deal with the tax consequences of: which are available under the terms of the scheme and described in the Product Brochure. 4. Interest deductions under section 8-1 for the amount referred to in subparagraph 20(a) of this Ruling are available to the Investor up to the time that the Investor uses one or more of the features listed in paragraph 3 of this Ruling. 5. This Ruling also does not address: the tax consequences of any upfront or trailing commissions, including any arrangement whereby commissions are rebated by a financial adviser to an Investor: Class of entities 6. This part of the Product Ruling specifies which entities: set out in the Ruling section of this Product Ruling. 7. The class of entities who can rely on this Product Ruling consists of those entities: and, at the time of entering into the scheme, These entities are referred to as Investor/s. 8. The class of entities who can rely on the tax benefits set out in the Ruling section of this Product Ruling does not include entities who: Superannuation Industry (Supervision) Act 1993 9. 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 10. 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 21 to 25 of this Ruling. 11. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then: 12. 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: 6. This part of the Product Ruling specifies which entities: set out in the Ruling section of this Product Ruling. 7. The class of entities who can rely on this Product Ruling consists of those entities: and, at the time of entering into the scheme, These entities are referred to as Investor/s. 8. The class of entities who can rely on the tax benefits set out in the Ruling section of this Product Ruling does not include entities who: | Superannuation Industry (Supervision) Act 1993: 9. 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: 10. 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 21 to 25 of this Ruling. 11. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then: 12. 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: 13. This Product Ruling applies prospectively from 9 March 2011. It therefore applies only to the specified class of entities that enter into the scheme from 9 March 2011 until 30 June 2013, 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. 14. 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: 15. 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 the Ruling and, to that extent, this Product Ruling will have no effect. 16. 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. | Proposed amendments to Division 247: 17. [Omitted]. 18. [Omitted]. | Note to promoters and advisers: 19. 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. 20. Subject to paragraphs 3, 4 and 5 of this Ruling, and the assumptions in paragraph 25 of this Ruling: 21. 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. 22. The documents described in paragraph 21 of this Ruling are those that an Investor may enter into. 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. 23. All Australian Securities and Investment Commission (ASIC) requirements are, or will be, complied with for the term of the agreements. | Overview: 24. Following is a summary of the scheme. | Assumptions: 25. This Ruling is made on the basis of the following necessary assumptions: Commissioner of Taxation 9 March 2011 | Section 8-1 and Division 247: 26. Interest paid on a borrowing used to acquire income producing assets such as shares or units is generally treated as deductible under section 8-1 where it is expected that dividends or other assessable income would be derived from the investment (see Taxation Ruling TR 95/33). However, the ability to claim interest deductions may be subject to Division 247. 27. Section 247-10 describes when a borrowing under an arrangement satisfies the requirements as a capital protected borrowing. Subsection 247-10(1) states: 28. Subsection 247-10(2) states: 29. Under the scheme, the amount reasonably attributable to the cost of capital protection afforded by the limited recourse loan facility is worked out according to the method statement in subsection 247-20(3) as set out in subparagraph 20(b) of this Ruling. This amount is treated as the cost of the Investor's Put Options under subsection 247-20(6). 30. For an Investor in the scheme, a Put Option is a capital asset. As the cost of capital protection is the cost of the Investor's Put Options, this expense is capital in nature. The interest charged on the GEI plus loan will be deductible under section 8-1 only to the extent that it does not constitute the cost of capital protection. 31. Under the arrangement where an Investor chooses to enter into a full recourse Interest Prepayment Loan in addition to a limited recourse GEI plus loan, only the borrowing under the limited recourse GEI plus loan is considered to be subject to capital protection. 32. An Interest Prepayment Loan can only be taken out by an Investor on a full recourse basis. There is no element of capital protection connected with this type of loan. 33. The Bank is entitled to apply the proceeds from the sale of an Investor's GEI Securities to effectively meet all outstanding loan amounts of the Investor on the Final Maturity Date. However, as the Interest Prepayment Loan is issued on a full recourse basis, the Investor will need to use their own funds to cover the shortfall (including any break costs), that is associated with this loan. | Section 51AAA: 34. Under the scheme it is contemplated that over the period of an Investor's involvement there will be assessable income derived by way of dividend income and/or trust income as well as by way of capital gain. As the interest would have been deductible under section 8-1 of the ITAA 1997 notwithstanding the inclusion of a capital gain, section 51AAA of the ITAA 1936 has no application to an Investor in the scheme. | Section 82KL: 35. 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: 36. 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 arrangement 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 that are of a capital nature. | Subdivision 328-C - small business entities for the purposes of Subdivision H: 37. Under section 328-110, 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: 38. The interest charge under the GEI plus loan deductible under section 8-1 of the ITAA 1997 is 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 and not to the period of the loan. | Sections 82KZME and 82KZMF - prepaid expenditure and 'tax shelter' style arrangements: 39. 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' style arrangement for the doing of a thing that is not to be wholly done within the expenditure year. 40. 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), the relevant 'agreement' is all the contractual arrangements and activities associated with the participation in the scheme, including the financing, share and/or unit purchase, share and/or unit holding and disposal arrangements. 41. Exception 1, as contained in subsection 82KZME(5) of the ITAA 1936, applies to exclude the amount of interest allowable as a deduction under section 8-1 of the ITAA 1997 on borrowings under the GEI plus loan from the operation of section 82KZMF of the ITAA 1936, as: 42. Deductibility of the prepaid interest must therefore be considered under the prepayment rules contained in paragraphs 43 to 48 of this Ruling. | Section 82KZM - prepaid expenditure incurred by certain small business entities and individuals incurring non-business expenditure: 43. 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: 44. 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. 45. As the eligible service period in relation to the deductible interest payments for the GEI plus loan is not more 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 a small business entity that has not chosen to apply section 82KZMD of the ITAA 1936 to the expenditure 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 amount allowable as a deduction under section 8-1 of the ITAA 1997 incurred on the GEI plus loan. | Sections 82KZMA and 82KZMD - prepaid non-business expenditure incurred by non-individual and non-small business entities: 46. Sections 82KZMA and 82KZMD of the ITAA 1936 set the amount and timing of deductions for expenditure for an Investor (other than a small business entity for the year of income that has not chosen to apply section 82KZMD to the expenditure) who is an Investor that is not an individual and does not incur the expenditure in carrying on a business. 47. 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 to be wholly done within the expenditure year. 48. For these taxpayers, the amount of prepaid interest allowable as a deduction under section 8-1 incurred on the GEI plus loan will be apportioned over the relevant interest payment period. | Division 110 - cost base of the Put Options: 49. The cost of capital protection is not deductible to the Investor under section 8-1 (refer to paragraph 20 of this Ruling) and is included in the first element of the cost base (under subsection 110-25(2)) and the reduced cost base (under subsection 110-55(2)) of a Put Option acquired by the Investor. Each Put Option constitutes a CGT asset, and is separate and in addition to the other rights created under the scheme as described in this Ruling. 50. As a single interest rate applies in respect of the GEI plus loan, including where more than one type of GEI Security is held, the investment will be treated as one arrangement for the purposes of Division 247. However, as a separate Put Option is deemed to be provided in respect of each type of GEI Security acquired with the GEI plus loan, the cost of capital protection will need to be reasonably apportioned to each Put Option. The proportion of the cost of capital protection that is reasonably attributable to each Put Option is the cost of each type of GEI Security acquired with the GEI plus loan divided by the cost of all of the GEI Securities acquired with the GEI plus loan, multiplied by the cost of capital protection. 51. If the Investor exercises a Put Option at the end of the GEI plus loan term by relying on the limited recourse provisions of the loan in relation to a type of GEI Security, the Investor will include the payment they are deemed to have made to acquire the Put Option in the second element of the Investor's cost base and reduced cost base of the GEI Security disposed of by the Bank (on behalf of the Investor) under its rights as mortgagee, pursuant to item 2 of the table in subsection 134-1(1). Any capital gain or capital loss the Investor makes from exercising a Put Option is disregarded under subsection 131-1(4). 52. Although the sale proceeds will be insufficient to repay the GEI plus loan, the Bank will have no recourse against the Investor to recover the shortfall. In this circumstance, the Investor will need to reduce the cost base (under subsection 110-45(3)) and the reduced cost base (under subsection 110-55(6)) of the GEI Security by the amount of the shortfall. The combined effect will be to give rise to a capital loss equal to, at the very least, the cost base of the Put Option. 53. If the Investor does not exercise a Put Option by the Maturity Date, the Put Option will be taken to have expired under subsection 247-30(2). This will cause CGT event C2 to happen pursuant to paragraph 104-25(1)(c). The Investor will make a capital loss at that time, equal to the reduced cost base of the Put Option. This would occur where: | Part IVA: 54. 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 including the Assumptions (see paragraphs 21 to 25 of this Ruling), it is accepted that the scheme is an ordinary commercial transaction and Part IVA of the ITAA 1936 will not apply. 55. The following is a detailed contents list for this Ruling: 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 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. 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 Macquarie Geared Equities Investment plus (GEI plus) which is a loan offered by Macquarie Bank Limited (the Bank) to acquire a selection of securities, including securities listed on the Australian Securities Exchange and units in registered managed investment schemes (GEI Securities) under the GEI plus Product Brochure 2011 dated 2 March 2011 (Product Brochure). 3. This Ruling does not deal with the tax consequences of: which are available under the terms of the scheme and described in the Product Brochure. 4. Interest deductions under section 8-1 for the amount referred to in subparagraph 20(a) of this Ruling are available to the Investor up to the time that the Investor uses one or more of the features listed in paragraph 3 of this Ruling. 5. This Ruling also does not address: the tax consequences of any upfront or trailing commissions, including any arrangement whereby commissions are rebated by a financial adviser to an Investor: | Class of entities: 6. This part of the Product Ruling specifies which entities: set out in the Ruling section of this Product Ruling. 7. The class of entities who can rely on this Product Ruling consists of those entities: and, at the time of entering into the scheme, These entities are referred to as Investor/s. 8. The class of entities who can rely on the tax benefits set out in the Ruling section of this Product Ruling does not include entities who: | Superannuation Industry (Supervision) Act 1993: 9. 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: 10. 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 21 to 25 of this Ruling. 11. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then: 12. 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:


Appendix: Section 8-1 and Division 247: 26. Interest paid on a borrowing used to acquire income producing assets such as shares or units is generally treated as deductible under section 8-1 where it is expected that dividends or other assessable income would be derived from the investment (see Taxation Ruling TR 95/33). However, the ability to claim interest deductions may be subject to Division 247. 27. Section 247-10 describes when a borrowing under an arrangement satisfies the requirements as a capital protected borrowing. Subsection 247-10(1) states: 28. Subsection 247-10(2) states: 29. Under the scheme, the amount reasonably attributable to the cost of capital protection afforded by the limited recourse loan facility is worked out according to the method statement in subsection 247-20(3) as set out in subparagraph 20(b) of this Ruling. This amount is treated as the cost of the Investor's Put Options under subsection 247-20(6). 30. For an Investor in the scheme, a Put Option is a capital asset. As the cost of capital protection is the cost of the Investor's Put Options, this expense is capital in nature. The interest charged on the GEI plus loan will be deductible under section 8-1 only to the extent that it does not constitute the cost of capital protection. 31. Under the arrangement where an Investor chooses to enter into a full recourse Interest Prepayment Loan in addition to a limited recourse GEI plus loan, only the borrowing under the limited recourse GEI plus loan is considered to be subject to capital protection. 32. An Interest Prepayment Loan can only be taken out by an Investor on a full recourse basis. There is no element of capital protection connected with this type of loan. 33. The Bank is entitled to apply the proceeds from the sale of an Investor's GEI Securities to effectively meet all outstanding loan amounts of the Investor on the Final Maturity Date. However, as the Interest Prepayment Loan is issued on a full recourse basis, the Investor will need to use their own funds to cover the shortfall (including any break costs), that is associated with this loan. | Section 51AAA: 34. Under the scheme it is contemplated that over the period of an Investor's involvement there will be assessable income derived by way of dividend income and/or trust income as well as by way of capital gain. As the interest would have been deductible under section 8-1 of the ITAA 1997 notwithstanding the inclusion of a capital gain, section 51AAA of the ITAA 1936 has no application to an Investor in the scheme. | Section 82KL: 35. 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: 36. 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 arrangement 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 that are of a capital nature. | Subdivision 328-C - small business entities for the purposes of Subdivision H: 37. Under section 328-110, 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: 38. The interest charge under the GEI plus loan deductible under section 8-1 of the ITAA 1997 is 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 and not to the period of the loan. | Sections 82KZME and 82KZMF - prepaid expenditure and 'tax shelter' style arrangements: 39. 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' style arrangement for the doing of a thing that is not to be wholly done within the expenditure year. 40. 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), the relevant 'agreement' is all the contractual arrangements and activities associated with the participation in the scheme, including the financing, share and/or unit purchase, share and/or unit holding and disposal arrangements. 41. Exception 1, as contained in subsection 82KZME(5) of the ITAA 1936, applies to exclude the amount of interest allowable as a deduction under section 8-1 of the ITAA 1997 on borrowings under the GEI plus loan from the operation of section 82KZMF of the ITAA 1936, as: 42. Deductibility of the prepaid interest must therefore be considered under the prepayment rules contained in paragraphs 43 to 48 of this Ruling. | Section 82KZM - prepaid expenditure incurred by certain small business entities and individuals incurring non-business expenditure: 43. 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: 44. 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. 45. As the eligible service period in relation to the deductible interest payments for the GEI plus loan is not more 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 a small business entity that has not chosen to apply section 82KZMD of the ITAA 1936 to the expenditure 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 amount allowable as a deduction under section 8-1 of the ITAA 1997 incurred on the GEI plus loan. | Sections 82KZMA and 82KZMD - prepaid non-business expenditure incurred by non-individual and non-small business entities: 46. Sections 82KZMA and 82KZMD of the ITAA 1936 set the amount and timing of deductions for expenditure for an Investor (other than a small business entity for the year of income that has not chosen to apply section 82KZMD to the expenditure) who is an Investor that is not an individual and does not incur the expenditure in carrying on a business. 47. 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 to be wholly done within the expenditure year. 48. For these taxpayers, the amount of prepaid interest allowable as a deduction under section 8-1 incurred on the GEI plus loan will be apportioned over the relevant interest payment period. | Division 110 - cost base of the Put Options: 49. The cost of capital protection is not deductible to the Investor under section 8-1 (refer to paragraph 20 of this Ruling) and is included in the first element of the cost base (under subsection 110-25(2)) and the reduced cost base (under subsection 110-55(2)) of a Put Option acquired by the Investor. Each Put Option constitutes a CGT asset, and is separate and in addition to the other rights created under the scheme as described in this Ruling. 50. As a single interest rate applies in respect of the GEI plus loan, including where more than one type of GEI Security is held, the investment will be treated as one arrangement for the purposes of Division 247. However, as a separate Put Option is deemed to be provided in respect of each type of GEI Security acquired with the GEI plus loan, the cost of capital protection will need to be reasonably apportioned to each Put Option. The proportion of the cost of capital protection that is reasonably attributable to each Put Option is the cost of each type of GEI Security acquired with the GEI plus loan divided by the cost of all of the GEI Securities acquired with the GEI plus loan, multiplied by the cost of capital protection. 51. If the Investor exercises a Put Option at the end of the GEI plus loan term by relying on the limited recourse provisions of the loan in relation to a type of GEI Security, the Investor will include the payment they are deemed to have made to acquire the Put Option in the second element of the Investor's cost base and reduced cost base of the GEI Security disposed of by the Bank (on behalf of the Investor) under its rights as mortgagee, pursuant to item 2 of the table in subsection 134-1(1). Any capital gain or capital loss the Investor makes from exercising a Put Option is disregarded under subsection 131-1(4). 52. Although the sale proceeds will be insufficient to repay the GEI plus loan, the Bank will have no recourse against the Investor to recover the shortfall. In this circumstance, the Investor will need to reduce the cost base (under subsection 110-45(3)) and the reduced cost base (under subsection 110-55(6)) of the GEI Security by the amount of the shortfall. The combined effect will be to give rise to a capital loss equal to, at the very least, the cost base of the Put Option. 53. If the Investor does not exercise a Put Option by the Maturity Date, the Put Option will be taken to have expired under subsection 247-30(2). This will cause CGT event C2 to happen pursuant to paragraph 104-25(1)(c). The Investor will make a capital loss at that time, equal to the reduced cost base of the Put Option. This would occur where: | Part IVA: 54. 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 including the Assumptions (see paragraphs 21 to 25 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. | [ Note: This is a consolidated version of this document. Refer to the ATO Legal Database (http://law.ato.gov.au) to check its currency and to view the details of all changes.] | 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 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. | That protection is called capital protection . | Appendix 2 - Detailed contents list


Related rulings: TR 95/33
Legislative references: ITAA 1936 51AAA ITAA 1936 82KL ITAA 1936 Pt III Div 3 Subdiv H 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) ITAA 1936 82KZME(5)(b)(iii) ITAA 1936 82KZMF ITAA 1936 Pt IVA ITAA 1997 ITAA 1997 8-1 ITAA 1997 104-10 ITAA 1997 104-25 ITAA 1997 104-25(1)(c) ITAA 1997 104-25(3) ITAA 1997 110-25(2) ITAA 1997 110-45(3) ITAA 1997 110-55(2) ITAA 1997 134-1(1) ITAA 1997 134-1(4) ITAA 1997 Div 247 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) SISA 1993 TAA 1953 Corporations Act 2001 Copyright Act 1968
Subject references: capital protected borrowings financial products interest expenses prepaid expenses product rulings public rulings taxation administration