Product Ruling PR 2022/8
Date of effect: 1 July 2022

What this ruling is about: 1. This Product Ruling sets out the Commissioner's opinion on the way in which the relevant provisions identified in the Ruling section apply to the defined class of entities that participates in the scheme to which this Product Ruling relates. All legislative references in this Product Ruling are to the Income Tax Assessment Act 1997, unless otherwise indicated. 2. In this Product Ruling the scheme is referred to as Bell Geared Equities Investment (GEI loan), which is a loan offered by Bell Potter Capital Limited (BPC) to acquire GEI Securities under the Bell Geared Equities Investment Product Brochure dated 11 November 2019 (Product Brochure). [1] In this Product Ruling, a reference to GEI Securities includes a reference to a portfolio of GEI Securities. 3. This Product Ruling does not address the tax consequences of rolling the GEI Securities into a new GEI loan for another term, or the Limited Trading feature. Interest deductions under section 8-1 for the amount referred to in paragraph 15(d) of this Product Ruling are available to the investor up to the time that the investor uses one or both of these features. 4. This Product Ruling does not address:

Class of entities or scheme: 5. This part of the Product Ruling specifies which entities can rely on the Ruling section of this Product Ruling and which entities cannot rely on the Ruling section. Those entities that can rely on the Ruling section are referred to as investors. 6. The class of entities that can rely on the Ruling section of this Product Ruling consists of those entities that: 7. The class of entities that can rely on the Ruling section of this Product Ruling does not include entities that: | Qualifications: 8. The class of entities defined in this Product Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 16 to 20 of this Product Ruling. 9. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then this Product Ruling:

Ruling: 1. This Product Ruling sets out the Commissioner's opinion on the way in which the relevant provisions identified in the Ruling section apply to the defined class of entities that participates in the scheme to which this Product Ruling relates. All legislative references in this Product Ruling are to the Income Tax Assessment Act 1997, unless otherwise indicated. 2. In this Product Ruling the scheme is referred to as Bell Geared Equities Investment (GEI loan), which is a loan offered by Bell Potter Capital Limited (BPC) to acquire GEI Securities under the Bell Geared Equities Investment Product Brochure dated 11 November 2019 (Product Brochure). [1] In this Product Ruling, a reference to GEI Securities includes a reference to a portfolio of GEI Securities. 3. This Product Ruling does not address the tax consequences of rolling the GEI Securities into a new GEI loan for another term, or the Limited Trading feature. Interest deductions under section 8-1 for the amount referred to in paragraph 15(d) of this Product Ruling are available to the investor up to the time that the investor uses one or both of these features. 4. This Product Ruling does not address: | Class of entities: 5. This part of the Product Ruling specifies which entities can rely on the Ruling section of this Product Ruling and which entities cannot rely on the Ruling section. Those entities that can rely on the Ruling section are referred to as investors. 6. The class of entities that can rely on the Ruling section of this Product Ruling consists of those entities that: 7. The class of entities that can rely on the Ruling section of this Product Ruling does not include entities that: | Qualifications: 8. The class of entities defined in this Product Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 16 to 20 of this Product Ruling. 9. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then this Product Ruling:


Appendix: Section 8-1 and Division 247: 21. 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 (refer to Taxation Ruling TR 95/33 Income tax: subsection 51(1) - relevance of subjective purpose, motive or intention in determining the deductibility of losses and outgoings). However, the ability to claim interest deductions may be subject to Division 247. 22. Division 247 limits the allowable deductions for expenditure incurred under a 'capital protected borrowing'. Broadly, a capital protected borrowing arises where an amount is borrowed under an arrangement where the borrower is protected against the fall in value of some specified securities, and where that borrowing is made for the purpose of investing in those securities. 23. Division 247 applies to the GEI loan where the investor uses the GEI loan to acquire GEI Securities and the investor is protected against the fall in the market value of the GEI Securities (or of one or more types of GEI Securities). 24. Division 247 sets out a methodology for reasonably attributing the cost of capital protection incurred by a borrower under a capital protected borrowing (section 247-20). Division 247 ignores any amount which is not in substance for capital protection or interest in calculating the cost of capital protection, pursuant to subsection 247-20(3). 25. The amount reasonably attributable to the cost of capital protection afforded by the GEI loan is worked out according to the method statement in subsection 247-20(3) as set out in paragraph 15(b) of this Product Ruling. This amount is treated as the cost of one or more of the investor's Put Options under subsection 247-20(6). 26. Each 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 loan will be deductible under section 8-1 only to the extent that it does not constitute the cost of capital protection (and does not correspond to the part of the GEI loan that is used to fund a brokerage fee). | Section 51AAA of the ITAA 1936: 27. 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 or trust income, or both, as well as by way of capital gain. As the interest would have been deductible under section 8-1 notwithstanding the inclusion of a net capital gain in assessable income, section 51AAA of the ITAA 1936 has no application to an investor in the scheme. | Section 82KL of the ITAA 1936: 28. The operation of section 82KL of the ITAA 1936 depends, among other things, on the identification of a certain quantum of 'additional benefits'. 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. | Subdivision H of Division 3 of Part III of the ITAA 1936: 29. Subdivision H of Division 3 of Part III of the ITAA 1936 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 that are of a capital nature. | Subdivision 328-C - small business entities for the purposes of Subdivision H of the ITAA 1936: 30. 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 of the ITAA 1936: 31. The interest charge under the GEI loan that is deductible under section 8-1 may be 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 of the ITAA 1936, 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 of the ITAA 1936 - prepaid expenditure and 'tax shelter' style arrangements: 32. The rules in sections 82KZME and 82KZMF of the ITAA 1936 apply, subject to the exceptions in section 82KZME of the ITAA 1936, 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. 33. 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 or unit purchase, share or unit holding and disposal arrangements. 34. Exception 1, as contained in subsection 82KZME(5) of the ITAA 1936, applies to exclude the amount of prepaid interest allowable as a deduction under section 8-1 on borrowings under the GEI loan from the operation of section 82KZMF of the ITAA 1936, as: 35. Deductibility of the prepaid interest must therefore be considered under the prepayment rules contained in paragraphs 36 to 41 of this Product Ruling. | Section 82KZM of the ITAA 1936 - prepaid expenditure incurred by certain small and medium business entities and individuals incurring non-business expenditure: 36. 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: 37. Section 82KZM of the ITAA 1936 applies if: 38. As the eligible service period in relation to the deductible interest payments for the GEI 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 referred to in paragraph 36 of this Product Ruling. Such investors will be able to claim an immediate deduction for any prepaid interest amount incurred on the GEI loan that is allowable as a deduction under section 8-1. | Sections 82KZMA and 82KZMD of the ITAA 1936 - prepaid non-business expenditure incurred by non-individual and non-small and medium business entities: 39. Sections 82KZMA and 82KZMD of the ITAA 1936 set the amount and timing of deductions for expenditure incurred by an investor (other than a small business entity or an entity covered by subsection 82KZMA(2A) of the ITAA 1936 [4] , 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. 40. 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. 41. For these investors, the amount of prepaid interest incurred on the GEI loan and allowable as a deduction under section 8-1 will be apportioned over the relevant interest payment period. | Division 110 - cost base of the Put Options: 42. The cost of capital protection is not deductible to the investor under section 8-1 (refer to paragraph 15(c) of this Product 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 Product Ruling. 43. As a single interest rate applies in respect of the GEI 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. As capital protection may be invoked in respect of each type of GEI Security a separate Put Option is deemed to be provided in respect of each type of GEI Security acquired with the GEI loan. The cost of capital protection will therefore 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 loan divided by the cost of all of the GEI Securities acquired with the GEI loan, multiplied by the cost of capital protection. 44. If the investor exercises a Put Option at the end of the GEI 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 BPC (on behalf of the investor) under its rights as mortgagee, pursuant to table item 2 of subsection 134-1(1). Any capital gain or capital loss the investor makes from exercising a Put Option is disregarded under subsection 134-1(4). 45. Although the sale proceeds will be insufficient to repay the GEI loan, BPC 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. 46. If the investor does not exercise a Put Option by the Final 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 will occur where: | Section 25-25 - Loan Establishment Fee: 47. Any Loan Establishment Fee incurred by an investor upon successful application for the GEI loan will be an allowable deduction pursuant to section 25-25. The Loan Establishment Fee will be deductible on a straight line basis over the term of the GEI loan. © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).


What this Ruling is about | If this Ruling applies to you, and you correctly rely on it, we will apply the law to you in the way set out in this Ruling. That is, you will not pay any more tax or penalties or interest in respect of the matters covered by this Ruling. | 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. | Date of effect: 10. This Product Ruling applies from 1 July 2022. It applies only to the specified class of entities that enter into the scheme from 1 July 2022 until 30 June 2025, being its period of application. Where relevant, this Product Ruling will continue to apply to those entities even after its period of application has ended for the scheme entered into during the period of application. | 11. However, the Product Ruling only applies to the extent that there is no change in the scheme or in the entity's involvement in the scheme. | Changes in the law: 12. Although this Product Ruling deals with the income tax laws enacted at the time it was issued, later amendments may impact on this Product Ruling. Any such change will take precedence over the application of this Product Ruling and, to that extent, this Product Ruling will have no effect. | 13. Entities that are considering participating in the scheme are advised to confirm with their tax adviser that changes in the law have not affected this Product Ruling since it was issued. | Note to promoters and advisers: 14. Product Rulings were introduced for the purpose of providing certainty about tax consequences for entities in schemes such as this. In keeping with that intention, the Commissioner suggests that promoters and advisers ensure that participants are fully informed of any legislative changes after the Product Ruling has issued. | 15. Subject to paragraphs 3 and 4 of this Product Ruling and the assumptions in paragraph 20 of this Product Ruling: | 16. The scheme that is the subject of this Product Ruling is identified and described in the following documents: | Note: Certain information has been provided on a commercial-in-confidence basis and will not be disclosed or released under Freedom of Information legislation. | 17. For the purposes of describing the scheme to which this 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. | 18. All Australian Securities and Investments Commission requirements are, or will be, complied with for the term of the agreements. | Overview: 19. The details of the GEI loan are summarised as follows: | Assumptions: 20. This Product Ruling is made on the basis of the following necessary assumptions: | Commissioner of Taxation 31 August 2022


Related rulings: TR 95/33 PR 2020/1
Legislative references: ITAA 1936 51AAA ITAA 1936 51(1) 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 82KZM(1A) ITAA 1936 82KZMA ITAA 1936 82KZMA(2A) 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 IVA ITAA 1997 8-1 ITAA 1997 25-25 ITAA 1997 104-10 ITAA 1997 104-25 ITAA 1997 104-25(1)(c) ITAA 1997 104-25(3) ITAA 1997 Div 110 ITAA 1997 110-25(2) ITAA 1997 110-45(3) ITAA 1997 110-55(2) ITAA 1997 110-55(6) ITAA 1997 134-1(1) ITAA 1997 134-1(4) ITAA 1997 Div 230 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 Corporations Act 2001 601EB