Product Ruling PR 2011/15
Date of effect: 27 July 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 apply to the defined class of entities, who take part in the scheme to which this Ruling relates. All legislative references in this Ruling are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise indicated. 2. In this Product Ruling the scheme is an investment in a Property Investor Trust (the Trust) offered by Chan & Naylor Australia Pty Ltd by way of subscription for Units in the Trust using borrowings on arm's length and commercial terms from an independent or related party, or both. 3. This Product Ruling does not address: Class of entities 4. This part of the Product Ruling specifies which entities can rely on the tax benefits set out in the Ruling section of this Product Ruling and which entities cannot rely on those tax benefits. In this Product Ruling, those entities that can rely on the tax benefits set out in this Ruling are referred to as the Registered Holder. 5. The class of entities who can rely on those tax benefits consists of those entities: 6. 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 7. This Product Ruling does not address the provisions of the Superannuation Industry (Supervision) Act 1993 (SISA). The Commissioner gives no assurance that the scheme is an appropriate investment for a superannuation fund. The trustees of superannuation funds are advised that no consideration has been given in this Product Ruling as to whether investment in this scheme may contravene the provisions of SISA. Qualifications 8. The class of entities defined in this Product Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 17 to 21. 9. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then: 10. 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. This part of the Product Ruling specifies which entities can rely on the tax benefits set out in the Ruling section of this Product Ruling and which entities cannot rely on those tax benefits. In this Product Ruling, those entities that can rely on the tax benefits set out in this Ruling are referred to as the Registered Holder. 5. The class of entities who can rely on those tax benefits consists of those entities: 6. 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: 7. This Product Ruling does not address the provisions of the Superannuation Industry (Supervision) Act 1993 (SISA). The Commissioner gives no assurance that the scheme is an appropriate investment for a superannuation fund. The trustees of superannuation funds are advised that no consideration has been given in this Product Ruling as to whether investment in this scheme may contravene the provisions of SISA. | Qualifications: 8. The class of entities defined in this Product Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 17 to 21. 9. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then: 10. 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: 11. This Product Ruling applies prospectively from 27 July 2011, the date it is published. It therefore applies only to the specified class of entities that enter into the scheme from 27 July 2011 and whose Units in the Trust are allotted on or before 30 June 2014. This Product Ruling provides advice on the availability of tax benefits to the specified class of entities for the income years up to 30 June 2014 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. 12. 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: 13. 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. 14. 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: 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: 18. For the purposes of describing the scheme to which this Ruling applies, there are no other agreements, whether formal or informal, and whether or not legally enforceable, which a Registered Holder or any associate of a Registered Holder, will be a party to, which are a part of the scheme. 19. All Australian Securities and Investment Commission (ASIC) 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 27 July 2011 | Assessability of Trust income: 22. Under the terms of the Units issued, the Registered Holder has fixed rights to certain income and capital gains derived by the Trust in respect of the Unit Asset(s) that the Units are related to. 23. To the extent that the net income of the Trust constitutes net income other than capital gains or franked distributions, the Registered Holder shall be assessable under section 97 of the ITAA 1936 on so much of the share of that net income of the Trust as reflects the proportion of income of the trust estate to which the Registered Holder is presently entitled, as adjusted by Division 6E of the ITAA 1936. 24. Where the net income of the Trust includes a net capital gain, subsection 115-215(3) will deem the Registered Holder to have made a capital gain referable to their attributable gain as calculated under section 115-225 and as adjusted under subsection 115-215(3) to take into account certain capital gains tax concessions claimed by the Trustee. 25. Where the net income of the Trust includes a franked distribution, the Registered Holder shall be required under subsection 207-35(4) to include in its assessable income its attributable franked distribution as calculated under section 207-37 and its share of any franking credit on the distribution. | Section 8-1 - Interest expenses: 26. Section 8-1 provides a taxpayer with a deduction for a loss or outgoing to the extent to which it is incurred in gaining or producing the taxpayer's assessable income. A loss or outgoing is not deductible to the extent that it is of a private or domestic nature. 27. For the purposes of section 8-1, the essential character of an interest expense is derived from the purpose of the borrowing and the application or the use of the borrowed funds. The laying out of the borrowed money for the purpose of gaining assessable income furnishes the required connection between the interest paid upon it by the taxpayer and the income derived by that taxpayer from its use ( Ure v. Federal Commissioner of Taxation (1981) 50 FLR 219; 81 ATC 4100 at 4104; (1981) 11 ATR 484 at 488). 28. Whilst interest paid on a borrowing used to acquire income producing assets such as units in a unit trust is generally treated as deductible under section 8-1 where it is expected that assessable income would be derived from the investment (see Taxation Ruling TR 95/33), a portion of an interest expense is not deductible to the extent that the borrowed money has been used to both acquire an income producing asset and to confer benefits on other persons (Taxation Determination TD 2009/17). 29. The interest incurred by the Registered Holder in respect of borrowings used to fund their subscription for Units in the Trust is wholly deductible under section 8-1 because the funds borrowed are not used to confer benefits on other persons (including other General Beneficiaries or any Remainder Beneficiaries). 30. This Ruling does not apply to Registered Holders who choose, or who are required to prepay interest under the borrowing taken out to subscribe for Units in the Trust. Subject to certain exclusions, amounts that are prepaid for a period that extends beyond the income year in which the expenditure is incurred may be subject to the prepayment provisions in Subdivision H of Division 3 of Part III of the ITAA 1936. Any Registered Holder who prepays such amounts may request a private ruling on the deductibility of interest in relation to their investment in the Trust. | Section 25-25 - Borrowing expenses: 31. Borrowing expenses incurred by the Registered Holder in respect of borrowings used to fund their subscription for Units in the Trust will be deductible under section 25-25. Where the borrowing expenses are $100 or less, they are wholly deductible in the income year incurred. Where the borrowing expenses exceed $100, the deduction is spread on a straight line basis over the period of the shorter of: | Section 51AAA: 32. Under the scheme, it is contemplated that the Registered Holder will derive assessable income by way of capital gains and other than by way of capital gains from their Units in the Trust. As the interest and borrowing expenses incurred by the Registered Holder will be deductible under section 8-1 and 25-25 respectively notwithstanding the inclusion of a net capital gain in their assessable income, section 51AAA of the ITAA 1936 has no application to the Registered Holder. | Part IVA - anti-avoidance: 33. 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 20 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. 34. 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: 18. For the purposes of describing the scheme to which this Ruling applies, there are no other agreements, whether formal or informal, and whether or not legally enforceable, which a Registered Holder or any associate of a Registered Holder, will be a party to, which are a part of the scheme. 19. All Australian Securities and Investment Commission (ASIC) 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 27 July 2011 | Assessability of Trust income: 22. Under the terms of the Units issued, the Registered Holder has fixed rights to certain income and capital gains derived by the Trust in respect of the Unit Asset(s) that the Units are related to. 23. To the extent that the net income of the Trust constitutes net income other than capital gains or franked distributions, the Registered Holder shall be assessable under section 97 of the ITAA 1936 on so much of the share of that net income of the Trust as reflects the proportion of income of the trust estate to which the Registered Holder is presently entitled, as adjusted by Division 6E of the ITAA 1936. 24. Where the net income of the Trust includes a net capital gain, subsection 115-215(3) will deem the Registered Holder to have made a capital gain referable to their attributable gain as calculated under section 115-225 and as adjusted under subsection 115-215(3) to take into account certain capital gains tax concessions claimed by the Trustee. 25. Where the net income of the Trust includes a franked distribution, the Registered Holder shall be required under subsection 207-35(4) to include in its assessable income its attributable franked distribution as calculated under section 207-37 and its share of any franking credit on the distribution. | Section 8-1 - Interest expenses: 26. Section 8-1 provides a taxpayer with a deduction for a loss or outgoing to the extent to which it is incurred in gaining or producing the taxpayer's assessable income. A loss or outgoing is not deductible to the extent that it is of a private or domestic nature. 27. For the purposes of section 8-1, the essential character of an interest expense is derived from the purpose of the borrowing and the application or the use of the borrowed funds. The laying out of the borrowed money for the purpose of gaining assessable income furnishes the required connection between the interest paid upon it by the taxpayer and the income derived by that taxpayer from its use ( Ure v. Federal Commissioner of Taxation (1981) 50 FLR 219; 81 ATC 4100 at 4104; (1981) 11 ATR 484 at 488). 28. Whilst interest paid on a borrowing used to acquire income producing assets such as units in a unit trust is generally treated as deductible under section 8-1 where it is expected that assessable income would be derived from the investment (see Taxation Ruling TR 95/33), a portion of an interest expense is not deductible to the extent that the borrowed money has been used to both acquire an income producing asset and to confer benefits on other persons (Taxation Determination TD 2009/17). 29. The interest incurred by the Registered Holder in respect of borrowings used to fund their subscription for Units in the Trust is wholly deductible under section 8-1 because the funds borrowed are not used to confer benefits on other persons (including other General Beneficiaries or any Remainder Beneficiaries). 30. This Ruling does not apply to Registered Holders who choose, or who are required to prepay interest under the borrowing taken out to subscribe for Units in the Trust. Subject to certain exclusions, amounts that are prepaid for a period that extends beyond the income year in which the expenditure is incurred may be subject to the prepayment provisions in Subdivision H of Division 3 of Part III of the ITAA 1936. Any Registered Holder who prepays such amounts may request a private ruling on the deductibility of interest in relation to their investment in the Trust. | Section 25-25 - Borrowing expenses: 31. Borrowing expenses incurred by the Registered Holder in respect of borrowings used to fund their subscription for Units in the Trust will be deductible under section 25-25. Where the borrowing expenses are $100 or less, they are wholly deductible in the income year incurred. Where the borrowing expenses exceed $100, the deduction is spread on a straight line basis over the period of the shorter of: | Section 51AAA: 32. Under the scheme, it is contemplated that the Registered Holder will derive assessable income by way of capital gains and other than by way of capital gains from their Units in the Trust. As the interest and borrowing expenses incurred by the Registered Holder will be deductible under section 8-1 and 25-25 respectively notwithstanding the inclusion of a net capital gain in their assessable income, section 51AAA of the ITAA 1936 has no application to the Registered Holder. | Part IVA - anti-avoidance: 33. 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 20 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. 34. The following is a detailed contents list for this Ruling: Not previously issued as a draft


Appendix: Assessability of Trust income: 22. Under the terms of the Units issued, the Registered Holder has fixed rights to certain income and capital gains derived by the Trust in respect of the Unit Asset(s) that the Units are related to. 23. To the extent that the net income of the Trust constitutes net income other than capital gains or franked distributions, the Registered Holder shall be assessable under section 97 of the ITAA 1936 on so much of the share of that net income of the Trust as reflects the proportion of income of the trust estate to which the Registered Holder is presently entitled, as adjusted by Division 6E of the ITAA 1936. 24. Where the net income of the Trust includes a net capital gain, subsection 115-215(3) will deem the Registered Holder to have made a capital gain referable to their attributable gain as calculated under section 115-225 and as adjusted under subsection 115-215(3) to take into account certain capital gains tax concessions claimed by the Trustee. 25. Where the net income of the Trust includes a franked distribution, the Registered Holder shall be required under subsection 207-35(4) to include in its assessable income its attributable franked distribution as calculated under section 207-37 and its share of any franking credit on the distribution. | Section 8-1 - Interest expenses: 26. Section 8-1 provides a taxpayer with a deduction for a loss or outgoing to the extent to which it is incurred in gaining or producing the taxpayer's assessable income. A loss or outgoing is not deductible to the extent that it is of a private or domestic nature. 27. For the purposes of section 8-1, the essential character of an interest expense is derived from the purpose of the borrowing and the application or the use of the borrowed funds. The laying out of the borrowed money for the purpose of gaining assessable income furnishes the required connection between the interest paid upon it by the taxpayer and the income derived by that taxpayer from its use ( Ure v. Federal Commissioner of Taxation (1981) 50 FLR 219; 81 ATC 4100 at 4104; (1981) 11 ATR 484 at 488). 28. Whilst interest paid on a borrowing used to acquire income producing assets such as units in a unit trust is generally treated as deductible under section 8-1 where it is expected that assessable income would be derived from the investment (see Taxation Ruling TR 95/33), a portion of an interest expense is not deductible to the extent that the borrowed money has been used to both acquire an income producing asset and to confer benefits on other persons (Taxation Determination TD 2009/17). 29. The interest incurred by the Registered Holder in respect of borrowings used to fund their subscription for Units in the Trust is wholly deductible under section 8-1 because the funds borrowed are not used to confer benefits on other persons (including other General Beneficiaries or any Remainder Beneficiaries). 30. This Ruling does not apply to Registered Holders who choose, or who are required to prepay interest under the borrowing taken out to subscribe for Units in the Trust. Subject to certain exclusions, amounts that are prepaid for a period that extends beyond the income year in which the expenditure is incurred may be subject to the prepayment provisions in Subdivision H of Division 3 of Part III of the ITAA 1936. Any Registered Holder who prepays such amounts may request a private ruling on the deductibility of interest in relation to their investment in the Trust. | Section 25-25 - Borrowing expenses: 31. Borrowing expenses incurred by the Registered Holder in respect of borrowings used to fund their subscription for Units in the Trust will be deductible under section 25-25. Where the borrowing expenses are $100 or less, they are wholly deductible in the income year incurred. Where the borrowing expenses exceed $100, the deduction is spread on a straight line basis over the period of the shorter of: | Section 51AAA: 32. Under the scheme, it is contemplated that the Registered Holder will derive assessable income by way of capital gains and other than by way of capital gains from their Units in the Trust. As the interest and borrowing expenses incurred by the Registered Holder will be deductible under section 8-1 and 25-25 respectively notwithstanding the inclusion of a net capital gain in their assessable income, section 51AAA of the ITAA 1936 has no application to the Registered Holder. | Part IVA - anti-avoidance: 33. 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 20 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. | Potential participants must form their own view about the commercial and financial viability of the product. The Commissioner recommends a financial (or other) adviser be consulted for such information. | This Product Ruling provides certainty for potential participants by confirming that the tax benefits set out in the Ruling part of this document are available, provided that the scheme is carried out in accordance with the information we have been given, and have described below in the Scheme part of this document. If the scheme is not carried out as described, participants lose the protection of this Product Ruling. | Appendix 2 - Detailed contents list


Related rulings: TR 95/33 TD 2009/17
Legislative references: ITAA 1936 51AAA ITAA 1936 Pt III Div 3 Subdiv H ITAA 1936 Pt III Div 6 ITAA 1936 97 ITAA 1936 Div 6E ITAA 1936 Pt IVA ITAA 1997 ITAA 1997 8-1 ITAA 1997 25-25 ITAA 1997 Div 102 ITAA 1997 Subdiv 115-C ITAA 1997 115-215(3) ITAA 1997 115-225 ITAA 1997 Subdiv 207-B ITAA 1997 207-35(4) ITAA 1997 207-37 ITAA 1997 Div 230 SISA 1993 TAA 1953 Copyright Act 1968
Case references: Ure v. Federal Commissioner of Taxation (1981) 50 FLR 219 81 ATC 4100 (1981) 11 ATR 484
Subject references: capital gains tax hybrid trusts income tax interest expenses product rulings public rulings taxation administration