Product Ruling PR 2008/58
Date of effect: 18 June 2008

What this ruling is about: 1. This Ruling sets out the Commissioner's opinion on the way in which the relevant provision(s) identified in the Ruling part apply to the defined class of entities, who participate in the scheme to which this Product Ruling relates. 2. In this Product Ruling the scheme is the borrowing of moneys on limited recourse terms to fund 100% of the initial share price of shares and/or stapled securities listed for quotation on the Australian Securities Exchange (ASX) or units in a widely held unit trust as described in subparagraph 82KZME(5)(b)(iii) of the Income Tax Assessment Act 1936 (ITAA 1936) referred to in this Product Ruling as 'Underlying Shares', on the terms of a lending investment known the MQ Listed Protected Loan (MQLPL) offered by Macquarie Bank Limited (Macquarie). 3. This Ruling does not address: Class of entities 4. The class of entities who can rely on this Product Ruling consists of those entities that are accepted to participate in the scheme specified below on or after the date this Product Ruling is published and which execute relevant Agreements mentioned in paragraph 18 of this Ruling on or before 30 June 2011. At the time of entering the Scheme, they must have a purpose of staying in the scheme until it is completed (that is being a party to the relevant agreements until their term expires), and deriving assessable income from this involvement. These entities are referred to as Investor/s. Superannuation Industry (Supervision) Act 1993 5. This Product Ruling does not address the provisions of the Superannuation Industry (Supervision) Act 1993 (SISA 1993). The Tax Office gives no assurance that the product 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 product may contravene the provisions of SISA 1993. Qualifications 6. The class of entities defined in this Product Ruling may rely on it provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 18 to 22 of this Ruling. 7. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then: 8. This work is copyright. Apart from any use as permitted under the Copyright Act 1968 , no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to:

Class of entities or scheme: 4. The class of entities who can rely on this Product Ruling consists of those entities that are accepted to participate in the scheme specified below on or after the date this Product Ruling is published and which execute relevant Agreements mentioned in paragraph 18 of this Ruling on or before 30 June 2011. At the time of entering the Scheme, they must have a purpose of staying in the scheme until it is completed (that is being a party to the relevant agreements until their term expires), and deriving assessable income from this involvement. These entities are referred to as Investor/s. | Superannuation Industry (Supervision) Act 1993: 5. This Product Ruling does not address the provisions of the Superannuation Industry (Supervision) Act 1993 (SISA 1993). The Tax Office gives no assurance that the product 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 product may contravene the provisions of SISA 1993. | Qualifications: 6. The class of entities defined in this Product Ruling may rely on it provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 18 to 22 of this Ruling. 7. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then: 8. This work is copyright. Apart from any use as permitted under the Copyright Act 1968 , no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to: 9. This Product Ruling applies prospectively from 18 June 2008 the date this Ruling is published. It therefore applies to the specified class of entities that enter into the scheme from 18 June 2008 until 30 June 2011, being its period of application. This Product Ruling will continue to apply to those entities even after its period of application for schemes entered into during the period of application. 10. However, the Product Ruling only applies to the extent that: 11. If this Product Ruling is inconsistent with a later public or private ruling, the relevant class of entities may rely on either ruling which applies to them (item 1 of subsection 357-75(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA)). 12. If this Product Ruling is inconsistent with an earlier private ruling, the private ruling is taken not to have been made if, when the Product Ruling is made, the following two conditions are met: If the above two conditions do not apply, the relevant class of entities may rely on either ruling which applies to them (item 3 of subsection 357-75(1) of Schedule 1 to the TAA). | Changes in the law: 13. Although this Product Ruling deals with the 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. 14. On 13 May 2008, the Treasurer announced that the Government will amend the benchmark interest rate in the capital protected borrowing rules from the Reserve Bank of Australia's indicator variable rate for personal unsecured loans (referred to in paragraph 17(c) of this Ruling) to the Reserve Bank of Australia's indicator variable rate for standard housing loans for capital protected borrowings entered into after 7:30pm (AEST) on 13 May 2008. If enacted, such changes will take precedence over the application of this Ruling and, to that extent, this Product Ruling will have no effect. 15. As the proposed law has not been enacted, we cannot give a legally binding ruling on this change until the relevant legislation is enacted. Once the change is enacted, this Product Ruling will be amended and reissued to reflect the change in the law. | Note to promoters and advisers: 16. 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 Tax Office suggests that promoters and advisers ensure that participants are fully informed of any legislative changes after the Product Ruling is issued. 17. Subject to paragraph 3 of this Ruling and the assumptions in paragraph 23 of this Ruling: 18. The scheme that is the subject of this Product Ruling is described below. The scheme is incorporated within 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. 19. The documents highlighted are those that an Investor may enter into. For the purposes of describing the scheme to which this Product Ruling applies, there are no other agreements, whether formal or informal, and whether or not legally enforceable, which an Investor or any associate of an Investor, will be a party to, which are a part of the scheme. 20. In this Ruling, unless otherwise defined, capitalised terms have the same meaning as in the scheme documents listed in paragraph 18 of this Ruling. 21. All Australian Securities and Investment Commission (ASIC) requirements are, or will be, complied with for the term of the agreements. The effect of these agreements is summarised as follows. | Overview: 22. Following is a summary of the scheme: | Assumptions: 23. This Ruling is made on the basis of the following necessary assumptions: Commissioner of Taxation 18 June 2008 | Section 8-1 and Division 247 - capital protected borrowings and deductibility of interest: 24. The interest paid on a borrowing used to acquire income producing assets, such as shares or units in a unit trust, is generally treated as deductible at the time it is incurred under section 8-1 of the ITAA 1997 where it is expected that dividends or other assessable income would be derived from the investment (see Taxation Ruling TR 95/33). However, the ability to claim interest deductions may be subject to Division 247 of the ITAA 1997. 25. Division 247 of the ITAA 1997 limits the allowable deductions for expenditure incurred under a 'capital protected borrowing'. Broadly, a capital protected borrowing is created where an amount is borrowed under an arrangement where the borrower is protected against the fall in value of a specified share, unit in a unit trust or stapled security where that borrowing is made for the purpose of investing in that share, unit or stapled security. 26. Division 247 of the ITAA 1997 applies to the Loan under MQLPL as a capital protected borrowing (CPB) because the Investor: 27. Division 247 of the ITAA 1997 sets out a methodology for reasonably attributing the cost of capital protection incurred by a borrower under a CPB (section 247-20 of the ITAA 1997). Division 247 ignores any amount which is not in substance for capital protection or interest, in calculating the cost of capital protection (subsection 247-20(3) of the ITAA 1997). 28. Under the MQLPL, the amount reasonably attributable to the cost of capital protection is worked out according to the method statement in subsection 247-20(3) of the ITAA 1997. This amount is treated as the cost of the Investor's Notional Put Option under subsection 247-20(6) of the ITAA 1997. 29. Under step 1 of the method statement, the total amount incurred by the Investor under or in respect of the CPB for the income year, includes the interest incurred on the Loan for the income year. 30. Where the Interest Amount incurred by the Investor in step 1 of the method statement is less than the total interest that would have been incurred by the Investor worked out under step 2 of the method statement, there is no amount reasonably attributable to the cost of capital protection. In these circumstances the Interest Amount will be deductible under section 8-1 of the ITAA 1997. 31. Where the Interest Amount incurred by the Investor is greater than the total interest that would have been incurred by the Investor worked out under step 2 of the method statement, the excess amount is reasonably attributable to the cost of capital protection and is treated as if it were incurred only for a Notional Put Option under Division 247 of the ITAA 1997. The Notional Put Option is a capital asset for an Investor in the MQLPL. As the amount reasonably attributable to the cost of capital protection is the cost of the Investor's Notional Put Option, this expense is capital in nature. The interest charged under a MQLPL will therefore only be deductible under section 8-1 of the ITAA 1997 to the extent that it is not reasonably attributable to the cost of capital protection. | Section 51AAA: 32. By entering into the MQLPL it is contemplated that an Investor will derive assessable income by the receipt of dividends and capital gains. As interest would have been deductible under section 8-1 of the ITAA 1997 notwithstanding the inclusion of a net capital gain in assessable income, section 51AAA of the ITAA 1936 has no application to an Investor in the MQLPL. | Section 82KL: 33. 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. Section 82KL 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: 34. Subdivision H of Division 3 of Part III (Subdivision H) 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. Subdivision H 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 of the ITAA 1997 - small business entity: 35. An Investor will be a small business entity for an income year if the Investor carries on a business and either | The eligible service period for the purposes of Subdivision H: 36. That part of the Interest Amount allowable as a deduction under section 8-1 of the ITAA 1997 is, if paid in advance, 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 purpose of Subdivision H, to be expenditure incurred under an agreement in return for the doing of a thing under the agreement for the period to which the interest payment relates. The eligible service period in relation to a payment of loan interest is determined by reference to the period to which the interest relates, and not to the period of the Loan. | Sections 82KZME and 82KZMF - prepaid expenditure and 'tax shelter' arrangements: 37. 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. 38. 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 a part. Under subsection 82KZME(4) of the ITAA 1936, the relevant 'agreement' is all the contractual arrangements and activities associated with the participation in the MQLPL, including the financing, purchase, holding and disposal arrangements. 39. Exception 1, as contained in subsection 82KZME(5) of the ITAA 1936 applies to exclude that part of the Interest Amount that is allowable as a deduction under section 8-1 of the ITAA 1997 incurred on the Loan, from the operation of section 82KZMF of the ITAA 1936 as: Deductibility of expenditure must therefore be considered under the prepayment rules outlined below. | Section 82KZM - prepaid expenditure incurred by small business entities and individuals incurring non-business expenditure: 40. 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: 41. 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. 42. As the eligible service period in relation to the deductible Interest Amount is not more than 12 months and does not end after the last day of the year of income after the one in which the expenditure was incurred, section 82KZM of the ITAA 1936 will have no application to investors who are small business entities for the year of income who do not elect for section 82KZMD of the ITAA 1936 to apply, 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 incurred. | Section 82KZMD - prepaid non-business expenditure incurred by taxpayers that are not individuals or small business entities: 43. Section 82KZMD of the ITAA 1936 sets the amount and timing of deductions for expenditure for an Investor who: 44. The expenditure must not be excluded expenditure and must be incurred in return for doing a thing under an agreement that is not wholly done within the expenditure year. 45. For these Investors, the deduction for prepaid interest incurred under the Loan allowable as a deduction under section 8-1 of the ITAA 1997 will be apportioned over the relevant interest payment period. | Section 25-25 - Borrowing Fees: 46. The Borrowing Fee is incurred to obtain the Loan. No part of the Borrowing Fee is attributable to capital protection. The Borrowing Fee is deductible in accordance with section 25-25 of the ITAA 1997 from the Effective Date. | Section 110-25 - cost base of Notional Put Option: 47. That part of any Interest Amount which is reasonably attributable to the cost of capital protection (if any) will form part of the cost base and reduced cost base of the Notional Put Option (subsections 110-25(2) and 110-55(2) of the ITAA 1997). Where the capital protection under the MQLPL is invoked, the Notional Put Option is taken to have been exercised pursuant to subsection 247-30(1)) of the ITAA 1997. Any capital gain or capital loss on exercise of the Notional Put Option is disregarded (subsection 134-1(4) of the ITAA 1997). The second element of the Investor's cost base and the reduced cost base for the Underlying Shares will include that part of the Interest Amount which is reasonably attributable to the cost of capital protection, being the cost of the Notional Put Option (subsection 134-1(1) of the ITAA 1997, item 2). | Section 104-25 - CGT event C2: 48. Where the capital protection under the MQLPL is not invoked, any Notional Put Option will expire at maturity. The expiration of the Notional Put Option gives rise to CGT event C2 (paragraph 104-25(1)(c) of the ITAA 1997). The capital proceeds on the lapsing of the Notional Put Option will be nil. The Investor will make a capital loss equal to the reduced cost base of the Notional Put Option. | Section 109-5 - acquisition of a CGT asset: 49. Section 109-5 of the ITAA 1997 applies to an Investor to treat them as having acquired the Underlying Shares at the time the Investor obtained beneficial ownership of the Underlying Shares. | Section 115-5 - discount capital gains: 50. Division 115 of the ITAA 1997 allows a taxpayer a discount on capital gains in certain circumstances. In accordance with section 115-5 of the ITAA 1997, any capital gain made by an Investor on the sale of the Underlying Shares will be treated as a discount capital gain where the Investor is an individual, trust or complying superannuation fund and has held the Underlying Shares for at least for 12 months (excluding the days of acquisition and disposal). | Schedule 2C - commercial debt forgiveness: 51. Where the limited recourse feature of the Loan comes into effect, the Investor is not required to repay the Loan amounts and therefore there will be commercial debt forgiveness under section 245-35 of Schedule 2C of the ITAA 1936. Under Schedule 2C of the ITAA 1936 where forgiveness results in the Investor having a positive 'net forgiven amount', the Investor will be required to reduce certain tax attributes to the extent of the net forgiven amount. 52. To determine the net forgiven amount of debt forgiveness it is first necessary to determine the 'gross forgiven amount'. In the Investor's circumstances Schedule 2C of the ITAA 1936 will have no practical effect as the gross forgiven amount in respect of the debt will be equal to zero. The gross forgiven amount is equal to the 'notional value' of the debt less any consideration paid or given in respect of the debt. 53. The notional value of the Loan is the lesser of the limited recourse debt outstanding at the time of the debt forgiveness and the market value of the lender's rights in relation to the Underlying Shares at the time of the debt forgiveness, under section 245-60 of Schedule 2C of the ITAA 1936. The situation where the limited recourse feature of the Loan may come into effect is where the market value of the Underlying Shares will not cover the Loan Amount. In such a situation the market value of Macquarie's rights in relation to the Underlying Shares should be no more than the market value of the Underlying Shares at that point in time. 54. The consideration paid by an Investor in respect of the debt forgiveness would be equal to the market value of any property given by the Investor, in respect of the debt forgiveness as determined at the time of the forgiveness, under paragraph 245-65(1)(b) of Schedule 2C of the ITAA 1936. This market value should be equal to the market value of Macquarie's rights in relation to the Underlying Shares. Therefore the gross forgiven amount will be nil. 55. Accordingly, Schedule 2C of the ITAA 1936 will not reduce an Investor's tax attributes where the limited recourse feature of the Loan comes into effect. | Section 97 - present entitlement: 56. The Investor is presently entitled to all of the income derived from the Underlying Share(s) including amounts which represent a distribution applied to reduce the Loan. Therefore, section 97 of the ITAA 1936 will apply to assess the Investor on the income derived from the Underlying Share(s). The Security Trustee will not be subject to tax on this income. | Part IVA: 57. Provided that the arrangement ruled on is entered into and carried out as described(see the Scheme section of this Ruling), it would be accepted as an ordinary commercial transaction and that Part IVA of the ITAA 1936 will not apply. 58. The following is a detailed contents list for this Ruling: Not previously issued as a draft

Ruling: This Product Ruling has been given on the basis that the entity(s) who applied for the Product Ruling, and their associates, will abide by strict terms of use. Any failure to comply with the terms of use may lead to the withdrawal of this Product Ruling. 1. This Ruling sets out the Commissioner's opinion on the way in which the relevant provision(s) identified in the Ruling part apply to the defined class of entities, who participate in the scheme to which this Product Ruling relates. 2. In this Product Ruling the scheme is the borrowing of moneys on limited recourse terms to fund 100% of the initial share price of shares and/or stapled securities listed for quotation on the Australian Securities Exchange (ASX) or units in a widely held unit trust as described in subparagraph 82KZME(5)(b)(iii) of the Income Tax Assessment Act 1936 (ITAA 1936) referred to in this Product Ruling as 'Underlying Shares', on the terms of a lending investment known the MQ Listed Protected Loan (MQLPL) offered by Macquarie Bank Limited (Macquarie). 3. This Ruling does not address: | Class of entities: 4. The class of entities who can rely on this Product Ruling consists of those entities that are accepted to participate in the scheme specified below on or after the date this Product Ruling is published and which execute relevant Agreements mentioned in paragraph 18 of this Ruling on or before 30 June 2011. At the time of entering the Scheme, they must have a purpose of staying in the scheme until it is completed (that is being a party to the relevant agreements until their term expires), and deriving assessable income from this involvement. These entities are referred to as Investor/s. | Superannuation Industry (Supervision) Act 1993: 5. This Product Ruling does not address the provisions of the Superannuation Industry (Supervision) Act 1993 (SISA 1993). The Tax Office gives no assurance that the product 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 product may contravene the provisions of SISA 1993. | Qualifications: 6. The class of entities defined in this Product Ruling may rely on it provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 18 to 22 of this Ruling. 7. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then: 8. This work is copyright. Apart from any use as permitted under the Copyright Act 1968 , no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to:


Appendix: Section 8-1 and Division 247 - capital protected borrowings and deductibility of interest: 24. The interest paid on a borrowing used to acquire income producing assets, such as shares or units in a unit trust, is generally treated as deductible at the time it is incurred under section 8-1 of the ITAA 1997 where it is expected that dividends or other assessable income would be derived from the investment (see Taxation Ruling TR 95/33). However, the ability to claim interest deductions may be subject to Division 247 of the ITAA 1997. 25. Division 247 of the ITAA 1997 limits the allowable deductions for expenditure incurred under a 'capital protected borrowing'. Broadly, a capital protected borrowing is created where an amount is borrowed under an arrangement where the borrower is protected against the fall in value of a specified share, unit in a unit trust or stapled security where that borrowing is made for the purpose of investing in that share, unit or stapled security. 26. Division 247 of the ITAA 1997 applies to the Loan under MQLPL as a capital protected borrowing (CPB) because the Investor: 27. Division 247 of the ITAA 1997 sets out a methodology for reasonably attributing the cost of capital protection incurred by a borrower under a CPB (section 247-20 of the ITAA 1997). Division 247 ignores any amount which is not in substance for capital protection or interest, in calculating the cost of capital protection (subsection 247-20(3) of the ITAA 1997). 28. Under the MQLPL, the amount reasonably attributable to the cost of capital protection is worked out according to the method statement in subsection 247-20(3) of the ITAA 1997. This amount is treated as the cost of the Investor's Notional Put Option under subsection 247-20(6) of the ITAA 1997. 29. Under step 1 of the method statement, the total amount incurred by the Investor under or in respect of the CPB for the income year, includes the interest incurred on the Loan for the income year. 30. Where the Interest Amount incurred by the Investor in step 1 of the method statement is less than the total interest that would have been incurred by the Investor worked out under step 2 of the method statement, there is no amount reasonably attributable to the cost of capital protection. In these circumstances the Interest Amount will be deductible under section 8-1 of the ITAA 1997. 31. Where the Interest Amount incurred by the Investor is greater than the total interest that would have been incurred by the Investor worked out under step 2 of the method statement, the excess amount is reasonably attributable to the cost of capital protection and is treated as if it were incurred only for a Notional Put Option under Division 247 of the ITAA 1997. The Notional Put Option is a capital asset for an Investor in the MQLPL. As the amount reasonably attributable to the cost of capital protection is the cost of the Investor's Notional Put Option, this expense is capital in nature. The interest charged under a MQLPL will therefore only be deductible under section 8-1 of the ITAA 1997 to the extent that it is not reasonably attributable to the cost of capital protection. | Section 51AAA: 32. By entering into the MQLPL it is contemplated that an Investor will derive assessable income by the receipt of dividends and capital gains. As interest would have been deductible under section 8-1 of the ITAA 1997 notwithstanding the inclusion of a net capital gain in assessable income, section 51AAA of the ITAA 1936 has no application to an Investor in the MQLPL. | Section 82KL: 33. 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. Section 82KL 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: 34. Subdivision H of Division 3 of Part III (Subdivision H) 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. Subdivision H 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 of the ITAA 1997 - small business entity: 35. An Investor will be a small business entity for an income year if the Investor carries on a business and either | The eligible service period for the purposes of Subdivision H: 36. That part of the Interest Amount allowable as a deduction under section 8-1 of the ITAA 1997 is, if paid in advance, 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 purpose of Subdivision H, to be expenditure incurred under an agreement in return for the doing of a thing under the agreement for the period to which the interest payment relates. The eligible service period in relation to a payment of loan interest is determined by reference to the period to which the interest relates, and not to the period of the Loan. | Sections 82KZME and 82KZMF - prepaid expenditure and 'tax shelter' arrangements: 37. 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. 38. 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 a part. Under subsection 82KZME(4) of the ITAA 1936, the relevant 'agreement' is all the contractual arrangements and activities associated with the participation in the MQLPL, including the financing, purchase, holding and disposal arrangements. 39. Exception 1, as contained in subsection 82KZME(5) of the ITAA 1936 applies to exclude that part of the Interest Amount that is allowable as a deduction under section 8-1 of the ITAA 1997 incurred on the Loan, from the operation of section 82KZMF of the ITAA 1936 as: Deductibility of expenditure must therefore be considered under the prepayment rules outlined below. | Section 82KZM - prepaid expenditure incurred by small business entities and individuals incurring non-business expenditure: 40. 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: 41. 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. 42. As the eligible service period in relation to the deductible Interest Amount is not more than 12 months and does not end after the last day of the year of income after the one in which the expenditure was incurred, section 82KZM of the ITAA 1936 will have no application to investors who are small business entities for the year of income who do not elect for section 82KZMD of the ITAA 1936 to apply, 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 incurred. | Section 82KZMD - prepaid non-business expenditure incurred by taxpayers that are not individuals or small business entities: 43. Section 82KZMD of the ITAA 1936 sets the amount and timing of deductions for expenditure for an Investor who: 44. The expenditure must not be excluded expenditure and must be incurred in return for doing a thing under an agreement that is not wholly done within the expenditure year. 45. For these Investors, the deduction for prepaid interest incurred under the Loan allowable as a deduction under section 8-1 of the ITAA 1997 will be apportioned over the relevant interest payment period. | Section 25-25 - Borrowing Fees: 46. The Borrowing Fee is incurred to obtain the Loan. No part of the Borrowing Fee is attributable to capital protection. The Borrowing Fee is deductible in accordance with section 25-25 of the ITAA 1997 from the Effective Date. | Section 110-25 - cost base of Notional Put Option: 47. That part of any Interest Amount which is reasonably attributable to the cost of capital protection (if any) will form part of the cost base and reduced cost base of the Notional Put Option (subsections 110-25(2) and 110-55(2) of the ITAA 1997). Where the capital protection under the MQLPL is invoked, the Notional Put Option is taken to have been exercised pursuant to subsection 247-30(1)) of the ITAA 1997. Any capital gain or capital loss on exercise of the Notional Put Option is disregarded (subsection 134-1(4) of the ITAA 1997). The second element of the Investor's cost base and the reduced cost base for the Underlying Shares will include that part of the Interest Amount which is reasonably attributable to the cost of capital protection, being the cost of the Notional Put Option (subsection 134-1(1) of the ITAA 1997, item 2). | Section 104-25 - CGT event C2: 48. Where the capital protection under the MQLPL is not invoked, any Notional Put Option will expire at maturity. The expiration of the Notional Put Option gives rise to CGT event C2 (paragraph 104-25(1)(c) of the ITAA 1997). The capital proceeds on the lapsing of the Notional Put Option will be nil. The Investor will make a capital loss equal to the reduced cost base of the Notional Put Option. | Section 109-5 - acquisition of a CGT asset: 49. Section 109-5 of the ITAA 1997 applies to an Investor to treat them as having acquired the Underlying Shares at the time the Investor obtained beneficial ownership of the Underlying Shares. | Section 115-5 - discount capital gains: 50. Division 115 of the ITAA 1997 allows a taxpayer a discount on capital gains in certain circumstances. In accordance with section 115-5 of the ITAA 1997, any capital gain made by an Investor on the sale of the Underlying Shares will be treated as a discount capital gain where the Investor is an individual, trust or complying superannuation fund and has held the Underlying Shares for at least for 12 months (excluding the days of acquisition and disposal). | Schedule 2C - commercial debt forgiveness: 51. Where the limited recourse feature of the Loan comes into effect, the Investor is not required to repay the Loan amounts and therefore there will be commercial debt forgiveness under section 245-35 of Schedule 2C of the ITAA 1936. Under Schedule 2C of the ITAA 1936 where forgiveness results in the Investor having a positive 'net forgiven amount', the Investor will be required to reduce certain tax attributes to the extent of the net forgiven amount. 52. To determine the net forgiven amount of debt forgiveness it is first necessary to determine the 'gross forgiven amount'. In the Investor's circumstances Schedule 2C of the ITAA 1936 will have no practical effect as the gross forgiven amount in respect of the debt will be equal to zero. The gross forgiven amount is equal to the 'notional value' of the debt less any consideration paid or given in respect of the debt. 53. The notional value of the Loan is the lesser of the limited recourse debt outstanding at the time of the debt forgiveness and the market value of the lender's rights in relation to the Underlying Shares at the time of the debt forgiveness, under section 245-60 of Schedule 2C of the ITAA 1936. The situation where the limited recourse feature of the Loan may come into effect is where the market value of the Underlying Shares will not cover the Loan Amount. In such a situation the market value of Macquarie's rights in relation to the Underlying Shares should be no more than the market value of the Underlying Shares at that point in time. 54. The consideration paid by an Investor in respect of the debt forgiveness would be equal to the market value of any property given by the Investor, in respect of the debt forgiveness as determined at the time of the forgiveness, under paragraph 245-65(1)(b) of Schedule 2C of the ITAA 1936. This market value should be equal to the market value of Macquarie's rights in relation to the Underlying Shares. Therefore the gross forgiven amount will be nil. 55. Accordingly, Schedule 2C of the ITAA 1936 will not reduce an Investor's tax attributes where the limited recourse feature of the Loan comes into effect. | Section 97 - present entitlement: 56. The Investor is presently entitled to all of the income derived from the Underlying Share(s) including amounts which represent a distribution applied to reduce the Loan. Therefore, section 97 of the ITAA 1936 will apply to assess the Investor on the income derived from the Underlying Share(s). The Security Trustee will not be subject to tax on this income. | Part IVA: 57. Provided that the arrangement ruled on is entered into and carried out as described(see the Scheme section of this Ruling), it would be accepted as 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, we must apply the law to you in the way set out in the ruling (or in a way that is more favourable for you if we are satisfied that the ruling is incorrect and disadvantages you, and we are 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. | No guarantee of commercial success: The Tax Office does not sanction or guarantee this product. Further, we give no assurance that the product is commercially viable, that charges are reasonable, appropriate or represent industry norms, or that projected returns will be achieved or are reasonably based. | Potential participants must form their own view about the commercial and financial viability of the product. We recommend 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. | The eligible service period for the purpose of Subdivision H | Section 109-5 - acquisition of CGT asset | Appendix 2 - Detailed contents list


Related rulings: TR 95/33
Legislative references: ITAA 1936 51AAA ITAA 1936 82KL ITAA 1936 82KZL(1) ITAA 1936 82KZL(2)(a) ITAA 1936 82KZM ITAA 1936 82KZMA ITAA 1936 82KZMD ITAA 1936 82KZME ITAA 1936 82KZME(4) ITAA 1936 82KZME(5) ITAA 1936 82KZME(5)(b)(iii) ITAA 1936 82KZMF ITAA 1936 97 ITAA 1936 Pt III Div 3 Subdiv H ITAA 1936 Pt IVA ITAA 1936 Sch 2C ITAA 1936 Sch 2C 245-35 ITAA 1936 Sch 2C 245-60 ITAA 1936 Sch 2C 245-65(1)(b) 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 109-5 ITAA 1997 110-25 ITAA 1997 110-25(2) ITAA 1997 110-25(3) ITAA 1997 110-45(3) ITAA 1997 110-55(2) ITAA 1997 110-55(3) ITAA 1997 110-55(6) ITAA 1997 Div 115 ITAA 1997 115-5 ITAA 1997 116-20 ITAA 1997 134-1 ITAA 1997 134-1(4) ITAA 1997 Div 247 ITAA 1997 247-20 ITAA 1997 247-20(3) ITAA 1997 247-20(6) ITAA 1997 247-30(1) ITAA 1997 247-30(2) ITAA 1997 Subdiv 328-C ITAA 1997 328-110(1) SISA 1993 TAA 1953 TAA 1953 Sch 1 357-75(1) Copyright Act 1968
Subject references: financial products interest expenses product rulings taxation administration tax avoidance