Product Ruling PR 2013/16
Date of effect: 18 September 2013

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 part apply to the defined class of entities who participate in the scheme to which this Product 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 the Macquarie Flexi 100 Trust (the Fund) using a limited recourse loan (Investment Loan) made by Macquarie Specialist Investments Lending Limited (the Loan Provider) and the grant of put options (the Put Options) over the investment by the Loan Provider. It also covers any further loan that is used to fund the payment of interest on the Investment Loan (referred to as the Interest Loan). The Investment Loan and Interest Loan are in the form of the Loan and Put Option Agreement contained in section 3 of the Information Booklet dated 18 September 2013 that forms part of the scheme. 3. This Ruling does not deal with the taxation consequences of: Class of entities 4. This part of the Product Ruling specifies which entities: set out in the Ruling section of this Product Ruling. 5. The class of entities 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. 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 16 to 29 of this Ruling. 9. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then:

Class of entities or scheme: 4. This part of the Product Ruling specifies which entities: set out in the Ruling section of this Product Ruling. 5. The class of entities 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. 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 16 to 29 of this Ruling. 9. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then: 10. This Product Ruling applies prospectively from 18 September 2013. It therefore applies to the specified class of entities that enter into the scheme from 18 September 2013 to 30 June 2016, 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. 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 changes will take precedence over the application of the Ruling and, to that extent, this Product Ruling will have no effect. 13. 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: 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 paragraph 3 of this Ruling and the assumptions in paragraph 29 of this Ruling: 16. 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. 17. The documents highlighted in paragraph 16 of this Ruling are those that an Investor will enter into or be a party to. 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 (ASIC) requirements are, or will be, complied with for the term of the agreements. | Overview: 19. Following is a summary of the scheme: | Loan and Put Option Agreement: 20. The Loan and Put Option Agreement will be between the Loan Provider and an Investor who takes out an Investment Loan to finance their investment in the Fund. This agreement also sets out the terms of the optional full recourse Interest Loan. 21. The Investment Loan will be limited recourse for the Loan Provider in respect of the principal owing on an Investment Loan. Accordingly, any amount payable by an Investor to the Loan Provider is limited to the Investor's Units and their proceeds. 22. The Loan and Put Option Agreement provides that Investors may redeem their Units in the Fund on the Maturity Date and they may also be given the opportunity to retain their Units. If Investors are given the option to retain their Units in the Fund, they will still be required to repay their Investment Loan and any Interest Loan at Maturity. This Product Ruling does not apply to schemes entered into after the Maturity Date, including the retention of Units by Investors . 23. The terms of the agreement in respect of the Investment Loan are: 24. The agreement also sets out the terms of the full recourse Interest Loan that is available to an Investor to fund the interest payment on the Investment Loan due on the Issue Date and subsequent Investment Loan Interest Payment Dates. The Interest Loan is repayable by monthly in arrears principal and interest repayments over the prepaid interest period on the Investment Loan and is limited to a period of twelve months; the interest is fixed for this period. The term of the Interest Loan cannot be extended and the indicative interest rate for an Interest Loan for the first interest period will be available in the relevant Term Sheet. 25. The obligations of an Investor (who is not a Superannuation Investor) under the Loan and Put Option Agreement will be secured by a Mortgage to be granted by the Investor in respect of the Units held and all related rights as holder of those Units (including proceeds) and also by the Collateral Security to be granted by the Responsible Entity over the Investor's interest in the Cash Collateral. 26. A Loan Establishment Fee of up to 2% of the Investment Loan may be charged by the Loan Provider. This fee is payable in full on the Issue Date if an Interest Loan is not utilised. 27. However, for Investors who take out an Interest Loan, the Loan Establishment Fee (if applicable) is payable by monthly repayments over the first year of the investment. These additional payments will be direct debited from an Investor's nominated bank account. | Put Option: 28. The Loan and Put Option Agreement also sets out the terms of the grant of Put Options by the Loan Provider. As a consideration for this grant, an Investor promises to pay the Put Option Premium. If not exercised in accordance with this agreement, each Put Option automatically lapses on the relevant Put Option Exercise Date. | Assumptions: 29. This Ruling is made on the basis of the following necessary assumptions: Commissioner of Taxation 18 September 2013 | Section 8-1 and Division 247: 30. 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 which relates to subsection 51(1) of the ITAA 1936 which was the predecessor of section 8-1 of the ITAA 1997). Investors in the Fund will derive assessable income in the form of fixed distributions and if available, a Reference Asset Gain. The assessable income from their investments is expected to be in excess of the expenditure Investors incur in connection with the investment. However, the ability to claim interest deductions may be subject to Division 247. 31. Section 247-10 describes when a borrowing under an arrangement satisfies the requirements as a capital protected borrowing. Subsection 247-10(1) states: 32. Subsection 247-10(2) states: 33. Where an Investor enters into an Investment Loan in order to acquire Units in the Fund, that Investor is wholly or partly protected against a fall in the market value of the acquired Units through the operation of Put Options that the Investor acquires under the Loan and Put Option Agreement. 34. However, under clause 2.1 of the Loan and Put Option Agreement in the Information Booklet dated 18 September 2013, the Loan Provider will only provide a loan to an Investor where that Investor has paid all of the interest that is payable on the Investment Loan on the Investment Loan Drawdown Date, or where the Investor has applied for an Interest Loan and this has been accepted by the Loan Provider. 35. Where Units are redeemed by the Investor at Maturity, the limited recourse aspect of the Investment Loan means that the amount payable by the Investor to the Loan Provider is limited to the proceeds of the redeemed Units (section 5.1.1 of the PDS dated 18 September 2013). Clause 10 of the Loan and Put Option Agreement in the Information Booklet dated 18 September 2013 reinforces this limitation where it is stated: 36. Where an Investor takes out an Investment Loan, that Investor will be granted Put Options by the Loan Provider in consideration for the Investor's promise to pay the Put Option Premium pursuant to clause 1.4 of the Loan and Put Option Agreement. The cost of capital protection associated with acquiring the Put Options is not deductible for tax purposes. 37. Clause 5 of the Loan & Put Option Agreement in the Information Booklet dated 18 September 2013 describes the situation where the Loan Provider may offset an outstanding loan amount against the sale price of the Put Property where an Investor exercises a Put Option on the Put Option Exercise Date. Clause 5 states each Put Option constitutes an irrevocable offer (by the Loan Provider to the Investor) to, on effective exercise of that Put Option, buy the Put Property for the Sale Price on the relevant Put Option Exercise Date (subject to certain conditions). 38. However clause 5(c) of the Loan & Put Option Agreement states that the Loan Provider may set-off the Outstanding Money in relation to each Loan against the Sale Price payable by the Loan Provider to the Investor. As such the Put Option arrangements provide some form of capital protection to Investors. 39. Under the arrangement where an Investor chooses to enter into a full recourse Interest Loan in addition to a limited recourse Investment Loan only the borrowing under the limited recourse Investment Loan is considered to be subject to capital protection. 40. An Interest Loan can only be taken out by an Investor on a full recourse basis. Section 5.2.1 of the PDS dated 18 September 2013 confirms the full recourse nature of this type of loan. There is no element of capital protection connected with this type of loan. 41. The Loan Provider is entitled to apply the proceeds from the redemption of an Investor's Units to effectively meet all outstanding loan amounts of the Investor at Maturity. However, as the Interest Loan is issued on a full recourse basis, the Investor will need to use their own funds to cover any shortfall (including any break costs), that is associated with this loan. 42. Division 247 sets out a methodology for reasonably attributing a cost to the capital protection obtained by a borrower under a capital protected borrowing. 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)). 43. Under the scheme, the amount reasonably attributable to the cost of capital protection afforded by the limited recourse provisions of the Investment Loan is worked out according to the method statement in subsection 247-20(3) as set out in subparagraph 15(c) of this Ruling. This amount is treated as the cost of the Investor's Put Option under subsection 247-20(6). 44. For an Investor in the scheme, the Put Option is a capital asset. As the cost of capital protection is the cost of the Investor's Put Option, this expense is capital in nature. The interest charged on the Investment Loan will be deductible under section 8-1 only to the extent that it does not constitute the cost of capital protection. | Section 51AAA: 45. 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 the Fund. As interest will be deductible under section 8-1 of the ITAA 1997 notwithstanding the inclusion of any net capital gain in the Investor's assessable income, section 51AAA of the ITAA 1936 has no application to an Investor. | Section 82KL: 46. 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: 47. 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 for the purposes of Subdivision H: 48. 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: 49. 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 making available an amount of 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: 50. 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. 51. 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' includes all the contractual arrangements and activities associated with the participation in a Fund, including the financing and management arrangements. 52. Exception 1, as contained in subsection 82KZME(5) of the ITAA 1936, applies to exclude the interest deductible 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: 53. Deductibility of expenditure must therefore be considered under the prepayment rules outlined in paragraphs 54 to 59 of this Ruling. | Section 82KZM - prepaid expenditure incurred by small business entities and individuals incurring non-business expenditure: 54. 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: 55. 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. 56. 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 that is incurred under an Investment Loan. | Sections 82KZMA and 82KZMD - prepaid non-business expenditure incurred by non-individuals and non-small business entities: 57. 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. 58. 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. 59. For these Investors, the deduction for prepaid interest on the Investment Loan will be apportioned over the relevant interest payment period. | Division 110 - cost base of the Put Options: 60. As the Loan and Put Option Agreement specifies more than one occasion on which the capital protection can be invoked, the income tax legislation applies as if there were a separate Put Option for each of those occasions, being each Put Option Exercise Date (subsection 247-25(1)). 61. The proportion of the Put Option Premium that is reasonably attributable to each Put Option is taken to have been incurred for that Put Option (subsection 247-25(1)). The proportion of the Put Option Premium that is reasonably attributable to each Put Option is the Put Option Premium multiplied by the number of days from the previous Put Option Exercise Date (or, in relation to the first Put Option Exercise Date, from the Issue Date) to the Put Option Exercise Date applicable to that Put Option, and divided by 365. That proportion of the Put Option Premium will form part of the cost base (under subsection 110-25(2)) and the reduced cost base (under subsection 110-55(2)) of the Put Option. 62. If an Investor does not exercise a Put Option on the relevant Put Option Exercise Date, that Put Option will expire (subsection 247-30(2)). Where a Put Option expires, CGT event C2 will happen (paragraph 104-25(1)(c)). The capital proceeds on the expiry of the Put Option will be nil. Therefore, an Investor will make a capital loss from CGT event C2 that is equal to the reduced cost base of the Put Option. | Commercial debt forgiveness: 63. The Investment Loan is a commercial debt under section 245-10. 64. Where the limited recourse provisions of the Investment Loan come into effect, an Investor is not required to repay the shortfall between the loan balance and the redemption proceeds of the Units. This will result in the forgiveness of a commercial debt at that time, under paragraph 245-35(a). 65. Under Division 245, where the forgiveness of a commercial debt results in the Investor having a positive 'net forgiven amount', the Investor will be required to reduce certain tax attributes that could otherwise reduce their taxable income (in the same or a later income year), to the extent of the net forgiven amount. 66. To calculate the net forgiven amount of a debt, it is first necessary to calculate the 'gross forgiven amount' of a debt. In the Investor's circumstances, Division 245 will have no practical effect as there will be no gross forgiven amount in respect of the Investment Loan. The gross forgiven amount is equal to the value of the debt when it is forgiven less the amount (if any) that is offset against the value of the debt when it is forgiven. 67. The value of the Investment Loan (being a debt owed by an Investor) when it is forgiven is worked out under subsection 245-60(1). Subsection 245-60(1) applies because, under subsection 245-60(2): 68. Under subsection 245-60(1), the value of the Investment Loan when it is forgiven is the market value at that time of the creditor's rights mentioned in paragraph 245-60(2)(b) (being the redemption price of the Units at that time, which is based on the net asset value per Unit for the relevant Class of Units). This is because the creditor has no right to recover the shortfall between the loan balance and the redemption proceeds of the Units. 69. The Investment Loan is a 'money lending debt' (being a debt resulting from a loan of money in the ordinary course of a business of lending money carried on by the creditor, the Loan Provider) and neither of items 4 and 6 of the table in subsection 245-65(1) apply. Therefore, item 1 of the table in subsection 245-65(1) will apply. 70. The amount that is offset against the value of a debt when it is forgiven is the market value, at the time of the forgiveness, of each item of property (other than money) that the debtor (an Investor) has given as a result of, or in respect of, the forgiveness of the debt. The market value of this property (the Investor's interest in the Units in the Fund) will be the redemption price of the Units at the time of the forgiveness. 71. Therefore, as the value of the Investment Loan when it is forgiven will be equal to the amount that is offset against the value of the loan when it is forgiven, there will be no gross forgiven amount in respect of the loan (subsection 245-75(2)). 72. Accordingly, the commercial debt forgiveness rules in Division 245 will not reduce the tax attributes of an Investor as a result of the debt forgiveness that occurs when the limited recourse provisions of the Investment Loan come into effect. | Subsection 159GP(1) - a Unit in the Fund is not a 'security': 73. Subsection 159GP(1) of the ITAA 1936 defines the term 'security'. Units in a unit trust will not be a security under paragraphs (a), (b) or (c) of the definition in subsection 159GP(1). Furthermore, units in a unit trust will not fall within the definition in paragraph (d) of subsection 159GP(1) unless there is a contract between the 'manager' of the unit trust (now commonly referred to as the responsible entity) and the unit holder under which there is a liability to pay an amount, and on the facts, that contract is found to be debt like (see paragraphs 4(ii) and 34 to 39 of Taxation Ruling TR 96/14). 74. A Unit in the Fund is not considered to be a contract between the Responsible Entity and the Unit holder, nor are the obligations between the Responsible Entity and the Unit holder considered to be debt like. Therefore, a Unit in the Fund does not meet the definition of security under subsection 159GP(1) of the ITAA 1936. | Section 25-25 - Loan Establishment Fee: 75. 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. The Loan Establishment Fee will be deductible on a straight line basis over the period of the shorter of: | Part IVA: 76. 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 16 to 29 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. 77. The following is a detailed contents list for this Ruling: © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products). Not previously issued as a draft

Ruling: This Product Ruling has been given on the basis that the entity(s) that applied for the Product Ruling, and their associates, will abide by strict terms of use. Any failure to comply with the terms of use may lead to the withdrawal of this Product Ruling. 1. This Product Ruling sets out the Commissioner's opinion on the way in which the relevant provisions identified in the Ruling part apply to the defined class of entities who participate in the scheme to which this Product 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 the Macquarie Flexi 100 Trust (the Fund) using a limited recourse loan (Investment Loan) made by Macquarie Specialist Investments Lending Limited (the Loan Provider) and the grant of put options (the Put Options) over the investment by the Loan Provider. It also covers any further loan that is used to fund the payment of interest on the Investment Loan (referred to as the Interest Loan). The Investment Loan and Interest Loan are in the form of the Loan and Put Option Agreement contained in section 3 of the Information Booklet dated 18 September 2013 that forms part of the scheme. 3. This Ruling does not deal with the taxation consequences of: | Class of entities: 4. This part of the Product Ruling specifies which entities: set out in the Ruling section of this Product Ruling. 5. The class of entities 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. 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 16 to 29 of this Ruling. 9. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then:


Appendix: Section 8-1 and Division 247: 30. 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 which relates to subsection 51(1) of the ITAA 1936 which was the predecessor of section 8-1 of the ITAA 1997). Investors in the Fund will derive assessable income in the form of fixed distributions and if available, a Reference Asset Gain. The assessable income from their investments is expected to be in excess of the expenditure Investors incur in connection with the investment. However, the ability to claim interest deductions may be subject to Division 247. 31. Section 247-10 describes when a borrowing under an arrangement satisfies the requirements as a capital protected borrowing. Subsection 247-10(1) states: 32. Subsection 247-10(2) states: 33. Where an Investor enters into an Investment Loan in order to acquire Units in the Fund, that Investor is wholly or partly protected against a fall in the market value of the acquired Units through the operation of Put Options that the Investor acquires under the Loan and Put Option Agreement. 34. However, under clause 2.1 of the Loan and Put Option Agreement in the Information Booklet dated 18 September 2013, the Loan Provider will only provide a loan to an Investor where that Investor has paid all of the interest that is payable on the Investment Loan on the Investment Loan Drawdown Date, or where the Investor has applied for an Interest Loan and this has been accepted by the Loan Provider. 35. Where Units are redeemed by the Investor at Maturity, the limited recourse aspect of the Investment Loan means that the amount payable by the Investor to the Loan Provider is limited to the proceeds of the redeemed Units (section 5.1.1 of the PDS dated 18 September 2013). Clause 10 of the Loan and Put Option Agreement in the Information Booklet dated 18 September 2013 reinforces this limitation where it is stated: 36. Where an Investor takes out an Investment Loan, that Investor will be granted Put Options by the Loan Provider in consideration for the Investor's promise to pay the Put Option Premium pursuant to clause 1.4 of the Loan and Put Option Agreement. The cost of capital protection associated with acquiring the Put Options is not deductible for tax purposes. 37. Clause 5 of the Loan & Put Option Agreement in the Information Booklet dated 18 September 2013 describes the situation where the Loan Provider may offset an outstanding loan amount against the sale price of the Put Property where an Investor exercises a Put Option on the Put Option Exercise Date. Clause 5 states each Put Option constitutes an irrevocable offer (by the Loan Provider to the Investor) to, on effective exercise of that Put Option, buy the Put Property for the Sale Price on the relevant Put Option Exercise Date (subject to certain conditions). 38. However clause 5(c) of the Loan & Put Option Agreement states that the Loan Provider may set-off the Outstanding Money in relation to each Loan against the Sale Price payable by the Loan Provider to the Investor. As such the Put Option arrangements provide some form of capital protection to Investors. 39. Under the arrangement where an Investor chooses to enter into a full recourse Interest Loan in addition to a limited recourse Investment Loan only the borrowing under the limited recourse Investment Loan is considered to be subject to capital protection. 40. An Interest Loan can only be taken out by an Investor on a full recourse basis. Section 5.2.1 of the PDS dated 18 September 2013 confirms the full recourse nature of this type of loan. There is no element of capital protection connected with this type of loan. 41. The Loan Provider is entitled to apply the proceeds from the redemption of an Investor's Units to effectively meet all outstanding loan amounts of the Investor at Maturity. However, as the Interest Loan is issued on a full recourse basis, the Investor will need to use their own funds to cover any shortfall (including any break costs), that is associated with this loan. 42. Division 247 sets out a methodology for reasonably attributing a cost to the capital protection obtained by a borrower under a capital protected borrowing. 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)). 43. Under the scheme, the amount reasonably attributable to the cost of capital protection afforded by the limited recourse provisions of the Investment Loan is worked out according to the method statement in subsection 247-20(3) as set out in subparagraph 15(c) of this Ruling. This amount is treated as the cost of the Investor's Put Option under subsection 247-20(6). 44. For an Investor in the scheme, the Put Option is a capital asset. As the cost of capital protection is the cost of the Investor's Put Option, this expense is capital in nature. The interest charged on the Investment Loan will be deductible under section 8-1 only to the extent that it does not constitute the cost of capital protection. | Section 51AAA: 45. 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 the Fund. As interest will be deductible under section 8-1 of the ITAA 1997 notwithstanding the inclusion of any net capital gain in the Investor's assessable income, section 51AAA of the ITAA 1936 has no application to an Investor. | Section 82KL: 46. 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: 47. 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 for the purposes of Subdivision H: 48. 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: 49. 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 making available an amount of 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: 50. 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. 51. 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' includes all the contractual arrangements and activities associated with the participation in a Fund, including the financing and management arrangements. 52. Exception 1, as contained in subsection 82KZME(5) of the ITAA 1936, applies to exclude the interest deductible 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: 53. Deductibility of expenditure must therefore be considered under the prepayment rules outlined in paragraphs 54 to 59 of this Ruling. | Section 82KZM - prepaid expenditure incurred by small business entities and individuals incurring non-business expenditure: 54. 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: 55. 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. 56. 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 that is incurred under an Investment Loan. | Sections 82KZMA and 82KZMD - prepaid non-business expenditure incurred by non-individuals and non-small business entities: 57. 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. 58. 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. 59. For these Investors, the deduction for prepaid interest on the Investment Loan will be apportioned over the relevant interest payment period. | Division 110 - cost base of the Put Options: 60. As the Loan and Put Option Agreement specifies more than one occasion on which the capital protection can be invoked, the income tax legislation applies as if there were a separate Put Option for each of those occasions, being each Put Option Exercise Date (subsection 247-25(1)). 61. The proportion of the Put Option Premium that is reasonably attributable to each Put Option is taken to have been incurred for that Put Option (subsection 247-25(1)). The proportion of the Put Option Premium that is reasonably attributable to each Put Option is the Put Option Premium multiplied by the number of days from the previous Put Option Exercise Date (or, in relation to the first Put Option Exercise Date, from the Issue Date) to the Put Option Exercise Date applicable to that Put Option, and divided by 365. That proportion of the Put Option Premium will form part of the cost base (under subsection 110-25(2)) and the reduced cost base (under subsection 110-55(2)) of the Put Option. 62. If an Investor does not exercise a Put Option on the relevant Put Option Exercise Date, that Put Option will expire (subsection 247-30(2)). Where a Put Option expires, CGT event C2 will happen (paragraph 104-25(1)(c)). The capital proceeds on the expiry of the Put Option will be nil. Therefore, an Investor will make a capital loss from CGT event C2 that is equal to the reduced cost base of the Put Option. | Commercial debt forgiveness: 63. The Investment Loan is a commercial debt under section 245-10. 64. Where the limited recourse provisions of the Investment Loan come into effect, an Investor is not required to repay the shortfall between the loan balance and the redemption proceeds of the Units. This will result in the forgiveness of a commercial debt at that time, under paragraph 245-35(a). 65. Under Division 245, where the forgiveness of a commercial debt results in the Investor having a positive 'net forgiven amount', the Investor will be required to reduce certain tax attributes that could otherwise reduce their taxable income (in the same or a later income year), to the extent of the net forgiven amount. 66. To calculate the net forgiven amount of a debt, it is first necessary to calculate the 'gross forgiven amount' of a debt. In the Investor's circumstances, Division 245 will have no practical effect as there will be no gross forgiven amount in respect of the Investment Loan. The gross forgiven amount is equal to the value of the debt when it is forgiven less the amount (if any) that is offset against the value of the debt when it is forgiven. 67. The value of the Investment Loan (being a debt owed by an Investor) when it is forgiven is worked out under subsection 245-60(1). Subsection 245-60(1) applies because, under subsection 245-60(2): 68. Under subsection 245-60(1), the value of the Investment Loan when it is forgiven is the market value at that time of the creditor's rights mentioned in paragraph 245-60(2)(b) (being the redemption price of the Units at that time, which is based on the net asset value per Unit for the relevant Class of Units). This is because the creditor has no right to recover the shortfall between the loan balance and the redemption proceeds of the Units. 69. The Investment Loan is a 'money lending debt' (being a debt resulting from a loan of money in the ordinary course of a business of lending money carried on by the creditor, the Loan Provider) and neither of items 4 and 6 of the table in subsection 245-65(1) apply. Therefore, item 1 of the table in subsection 245-65(1) will apply. 70. The amount that is offset against the value of a debt when it is forgiven is the market value, at the time of the forgiveness, of each item of property (other than money) that the debtor (an Investor) has given as a result of, or in respect of, the forgiveness of the debt. The market value of this property (the Investor's interest in the Units in the Fund) will be the redemption price of the Units at the time of the forgiveness. 71. Therefore, as the value of the Investment Loan when it is forgiven will be equal to the amount that is offset against the value of the loan when it is forgiven, there will be no gross forgiven amount in respect of the loan (subsection 245-75(2)). 72. Accordingly, the commercial debt forgiveness rules in Division 245 will not reduce the tax attributes of an Investor as a result of the debt forgiveness that occurs when the limited recourse provisions of the Investment Loan come into effect. | Subsection 159GP(1) - a Unit in the Fund is not a 'security': 73. Subsection 159GP(1) of the ITAA 1936 defines the term 'security'. Units in a unit trust will not be a security under paragraphs (a), (b) or (c) of the definition in subsection 159GP(1). Furthermore, units in a unit trust will not fall within the definition in paragraph (d) of subsection 159GP(1) unless there is a contract between the 'manager' of the unit trust (now commonly referred to as the responsible entity) and the unit holder under which there is a liability to pay an amount, and on the facts, that contract is found to be debt like (see paragraphs 4(ii) and 34 to 39 of Taxation Ruling TR 96/14). 74. A Unit in the Fund is not considered to be a contract between the Responsible Entity and the Unit holder, nor are the obligations between the Responsible Entity and the Unit holder considered to be debt like. Therefore, a Unit in the Fund does not meet the definition of security under subsection 159GP(1) of the ITAA 1936. | Section 25-25 - Loan Establishment Fee: 75. 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. The Loan Establishment Fee will be deductible on a straight line basis over the period of the shorter of: | Part IVA: 76. 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 16 to 29 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 Tax Office 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. | Weighted basket of stock market indices or index tracking funds, including some or all of the Hang Seng H Share Index ETF, Tracker Fund of Hong Kong, MSCI Taiwan Index, KOSPI 200 Index and MSCI Singapore Index | Australian Equity Focus Basket | A weighted basket of 10 20 ASX listed shares with large market capitalisation | The best performing of two baskets: the ASX Tilt Basket and the Bond Fund Tilt Basket | A fixed basket providing exposure to the PIMCO GIS Total Return Bond Fund (60%), S&P/ASX 200 Index (20%) and Winton Global Alpha Fund (20%) | Bond Fund Tilt (US) Basket | A fixed basket providing exposure to the PIMCO GIS Total Return Bond Fund (60%), S&P 500 Index (20%) and Winton Global Alpha Fund (20%) | European Equity Classes: EURO STOXX 50(r) Index | Provides a blue chip representation of super sector leaders in the Eurozone. The index is a market capitalisation weighted index of 50 stocks from 12 Eurozone countries | European Select Dividend Classes: EURO STOXX(r) Select Dividend 30 Index | Provides a measure of the performance of the highest dividend paying stocks in the Eurozone relative to their home markets. The Index comprises 30 high dividend yielding companies across 12 Eurozone countries | A basket comprising the S&P 500 Index, the EURO STOXX 50 Index, the iShares Asia 50 ETF and the Winton Global Alpha Fund | International Low Volatility Basket | US and Eurozone focused indices over equities with relatively low one year realised volatility, and a basket of indices and ETFs with exposure to equities in Hong Kong, Singapore, South Korea and Taiwan | A basket comprising at least 2 shares listed on US exchanges with large market capitalisation | The Barclays US Low Volatility Equity Index. Invests in US stocks with low volatility relative to other US stocks and aims to provide higher risk adjusted returns than a broad equity index | US Low Volatility: S&P 500 Low Volatility Index | The S&P 500 Low Volatility Index | That protection is called capital protection . | ... your [the Investor] liability to pay any amount in respect of the Investment Loan under this agreement may only be discharged from, and our [the Loan Provider] recourse against you [the Investor] in respect of any such amount is limited to, the amount which we [the Loan Provider] can obtain by enforcing our rights relating to the Mortgaged Property ... | What this Product Ruling is about | Appendix 2 - Detailed contents list


Related rulings: TR 95/33
Legislative references: ITAA 1936 51(1) 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)(iii) ITAA 1936 82KZMF ITAA 1936 159GP(1) ITAA 1936 159GP(1)(a) ITAA 1936 159GP(1)(b) ITAA 1936 159GP(1)(c) ITAA 1936 159GP(1)(d) ITAA 1936 Pt III Div 6 ITAA 1936 Pt IVA ITAA 1936 272-5(3) ITAA 1997 ITAA 1997 8-1 ITAA 1997 25-25 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 110-55(2) ITAA 1997 Div 230 ITAA 1997 Div 245 ITAA 1997 245-10 ITAA 1997 245-35(a) ITAA 1997 245-60(1) ITAA 1997 245-60(2) ITAA 1997 245-60(2)(b) ITAA 1997 245-75(2) ITAA 1997 Div 247 ITAA 1997 247-10 ITAA 1997 247-10(1) ITAA 1997 247-10(2) ITAA 1997 247-20(3) ITAA 1997 247-20(4) ITAA 1997 247-20(5) ITAA 1997 247-20(6) ITAA 1997 247-25(1) ITAA 1997 247-30(2) ITAA 1997 Subdiv 328-C ITAA 1997 328-110 ITAA 1997 328-110(1) SISA 1993 TAA 1953
Subject references: interest expenses prepaid expenses product rulings public rulings tax administration