Product Ruling PR 2012/2
Date of effect: 7 March 2012

What this ruling is about: 1. This Ruling sets out the Commissioner's opinion on the way in which the relevant provisions identified in the Ruling 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 units of the Westpac Enhance Trust, issued by Westpac RE Limited (as responsible entity of the Westpac Enhance Trust) that is financed by way of a Limited Recourse Investment Loan, offered by Westpac Banking Corporation (Westpac). 3. This Ruling does not deal with the taxation consequences of: Class of entities 4. This part of the Product Ruling specifies which entities: 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 17 to 21 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 work is copyright. Apart from any use as permitted under the Copyright Act 1968 , no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to:

Class of entities or scheme: 4. This part of the Product Ruling specifies which entities: 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 17 to 21 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 work is copyright. Apart from any use as permitted under the Copyright Act 1968 , no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to: 11. This Product Ruling applies prospectively from 7 March 2012, the date it is published. It therefore applies to the specified class of entities that enter into the scheme from 7 March 2012 to 30 June 2014 being its period of application. This Product Ruling will continue to apply to those entities even after its period of application has ended for the scheme entered into during the period of application. 12. However, the Product Ruling only applies to the extent that there is no change in the scheme or in the entity's involvement in the scheme. | Changes in the law: 13. Although this Product Ruling deals with the income tax laws enacted at the time it was issued, later amendments may impact on this Product Ruling. Any such changes will take precedence over the application of the Ruling and, to that extent, this Product Ruling will have no effect. 14. Entities who are considering participating in the scheme are advised to confirm with their taxation adviser that changes in the law have not affected this Product Ruling since it was issued. | Note to promoters and advisers: 15. Product Rulings were introduced for the purpose of providing certainty about tax consequences for entities in schemes such as this. In keeping with that intention the Commissioner suggests that promoters and advisers ensure that participants are fully informed of any legislative changes after the Product Ruling has issued. 16. Subject to paragraph 3 of this Ruling and the assumptions in paragraph 30 of this Ruling: 17. 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. 18. The documents referred to in paragraph 17 of this Ruling are those that an Investor will enter into or be affected by. 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. 19. All requirements imposed by the Australian Securities and Investment Commission (ASIC) have been, or will be, complied with for the term of the agreements. | Overview: 20. The details of the product are summarised: | Assumptions: 21. This Ruling is made on the basis of these assumptions: Commissioner of Taxation 7 March 2012 | Section 8-1 and Division 247: 22. Interest paid on a borrowing used to acquire income producing assets such as shares or units is generally treated as deductible under section 8-1 where it is expected that dividends or other assessable income will be derived from the investment (see Taxation Ruling TR 95/33 which relates to subsection 51(1) of the ITAA 1936, the predecessor of section 8-1 of the ITAA 1997). Investors in the Fund will derive assessable income in the form of variable distributions. The assessable income from their investments is expected to be in excess of the expenditure they incurred. 23. Division 247 applies to the scheme as a capital protected borrowing. An Investor uses the Limited Recourse Investment Loan to acquire units in the Fund (being units of a widely held unit trust). Where units are redeemed by the Investor, the Investor is protected against a fall in the market value of the units through the limited recourse provisions of the loan. The amount payable by the Investor to Westpac in respect of the principal is limited to the proceeds of the redeemed units. 24. 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)). 25. Under the scheme, the amount reasonably attributable to the cost of capital protection afforded by the limited recourse provisions of the loan is worked out according to the method statement in subsection 247-20(3) as set out in subparagraph 16(c) of this Ruling. This amount is treated as the cost of the Investor's Put Option under subsection 247-20(6). 26. 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 Limited Recourse 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: 27. Under the scheme, it is contemplated that over the period of an Investor's involvement there will be assessable income derived by way of distributions of the net income of the Fund. As interest will be deductible under section 8-1 of the ITAA 1997, section 51AAA of the ITAA 1936 has no application to an Investor. | Section 82KL: 28. 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: 29. 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) 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: 30. Under section 328-110, an Investor carrying on a business in an income year will be a small business entity for that year (the current year) if: | The eligible service period for the purposes of Subdivision H: 31. The prepaid interest charges on the Limited Recourse 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 the making available of a loan principal is to be taken, for the purposes of Subdivision H, to be expenditure incurred under an agreement in return for the doing of a thing under the agreement for the period to which the interest payment relates. The eligible service period in relation to a payment of loan interest is determined by reference to the period to which the interest relates, which is 12 months, and not to the period of the loan. | Sections 82KZME and 82KZMF - prepaid expenditure and tax shelter arrangements: 32. 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. 33. For the purposes of section 82KZME of the ITAA 1936, 'agreements' are broadly defined to include an entire arrangement of which a contract may form part. Under subsection 82KZME(4), the relevant 'agreement' includes all the contractual arrangements and activities associated with the participation in the agreement, including the financing and management arrangements. 34. 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 Limited Recourse Investment Loan, from the operation of section 82KZMF of the ITAA 1936 as: 35. Deductibility of expenditure must therefore be considered under the prepayment rules outlined in paragraphs 36 to 41 of this Ruling. | Section 82KZM - prepaid expenditure incurred by small business entities and individuals incurring non-business expenditure: 36. Section 82KZM of the ITAA 1936 operates to spread over more than one income year a deduction for prepaid expenditure incurred by a taxpayer that is either: 37. 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. 38. As the eligible service period in relation to a deductible interest payment under a Limited Recourse 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 a Limited Recourse Investment Loan. | Sections 82KZMA and 82KZMD - prepaid non-business expenditure incurred by non-individuals and non-small business entities: 39. 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. 40. The expenditure must not be excluded expenditure and must be incurred in return for the doing of a thing under an agreement that is not wholly done within the expenditure year. 41. For these Investors, the deduction for prepaid interest on the Limited Recourse Investment Loan will be apportioned over the relevant interest payment period. | Division 110 - cost base of the Put Option: 42. The cost of capital protection is not deductible to an Investor under section 8-1. Under the terms of the Limited Recourse Investment Loan and the Product Disclosure Statement, an Investor only has the unconditional right to invoke the capital protection at the Maturity Date. Therefore, the income tax legislation applies as if there was a single Put Option for the period ending at the Maturity Date (subsection 247-25(2)). The Put Option constitutes a CGT asset, and is separate and in addition to the other rights created under the scheme as described in this Ruling. 43. The total cost of capital protection under Division 247 will be included in the first element of the cost base (under subsection 110-25(2)) and the reduced cost base (under subsection 110-55(2)) of the Put Option. 44. An Investor will be taken to exercise the Put Option if they redeem their units in the Westpac Enhance Trust, and the redemption proceeds will not fully repay the balance of the Limited Recourse Investment Loan. The limited recourse provisions of the loan will then come into effect, which will amount to invoking the capital protection (subsection 247-30(1)). If the Investor exercises the Put Option, the Investor will include the payment they are deemed to have made to acquire the Put Option in the second element of the cost base and the reduced cost base of their units in the Westpac Enhance Trust pursuant to item 2 of the table in subsection 134-1(1). Any capital gain or capital loss the Investor makes from exercising the Put Option will be disregarded under subsection 134-1(4). 45. The limited recourse provisions of the loan mean that Westpac will have no recourse against the Investor to recover the shortfall between the redemption proceeds and the balance of the Limited Recourse Investment Loan. In this circumstance, the Investor will need to reduce the cost base (under subsection 110-45(3)) and the reduced cost base (under subsection 110-55(6)) of their units by the amount of the shortfall. The combined effect will be to give rise to a capital loss equal to, at the very least, the reduced cost base of the Put Option. 46. If an Investor does not exercise the Put Option, the Put Option will be taken to have expired (subsection 247-30(2)). An Investor will be taken to have not exercised the Put Option where they redeem their units and the redemption proceeds will fully repay the balance of the Limited Recourse Investment Loan. 47. Where the 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: 48. The Limited Recourse Investment Loan is a commercial debt under section 245-10. 49. Where the limited recourse provisions of the Limited Recourse 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). 50. 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. 51. 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 Limited Recourse 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. 52. The value of the Limited Recourse 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): 53. Under subsection 245-60(1), the value of the Limited Recourse 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. 54. The Limited Recourse Investment Loan is a 'moneylending 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. 55. 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 Westpac Enhance Trust) will be the redemption price of the units at the time of the forgiveness. 56. Therefore, as the value of the Limited Recourse 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)). 57. 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 Limited Recourse Investment Loan come into effect. | Section 25-25 - Loan Establishment Fee: 58. The Loan Establishment Fee, if applicable, incurred by an Investor upon successful application for a Limited Recourse 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: | Subsection 159GP(1) - a Unit in the Fund is not a 'security': 59. 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 and the unit holder under which there is a liability to pay an amount, and on the facts, the contract is found to be debt like (see paragraphs 4(ii) and 34 to 39 of Taxation Ruling TR 96/14). 60. A unit in the Fund is not considered to be a contract between the Trustee and the unit holder, nor are the obligations between the Trustee 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. | Part IVA: 61. 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 17 to 21 of this Ruling), it is accepted that the scheme is an ordinary commercial transaction and that Part IVA of the ITAA 1936 will not apply. 62. 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 provisions identified in the Ruling 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 units of the Westpac Enhance Trust, issued by Westpac RE Limited (as responsible entity of the Westpac Enhance Trust) that is financed by way of a Limited Recourse Investment Loan, offered by Westpac Banking Corporation (Westpac). 3. This Ruling does not deal with the taxation consequences of: | Class of entities: 4. This part of the Product Ruling specifies which entities: 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 17 to 21 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 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: 22. Interest paid on a borrowing used to acquire income producing assets such as shares or units is generally treated as deductible under section 8-1 where it is expected that dividends or other assessable income will be derived from the investment (see Taxation Ruling TR 95/33 which relates to subsection 51(1) of the ITAA 1936, the predecessor of section 8-1 of the ITAA 1997). Investors in the Fund will derive assessable income in the form of variable distributions. The assessable income from their investments is expected to be in excess of the expenditure they incurred. 23. Division 247 applies to the scheme as a capital protected borrowing. An Investor uses the Limited Recourse Investment Loan to acquire units in the Fund (being units of a widely held unit trust). Where units are redeemed by the Investor, the Investor is protected against a fall in the market value of the units through the limited recourse provisions of the loan. The amount payable by the Investor to Westpac in respect of the principal is limited to the proceeds of the redeemed units. 24. 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)). 25. Under the scheme, the amount reasonably attributable to the cost of capital protection afforded by the limited recourse provisions of the loan is worked out according to the method statement in subsection 247-20(3) as set out in subparagraph 16(c) of this Ruling. This amount is treated as the cost of the Investor's Put Option under subsection 247-20(6). 26. 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 Limited Recourse 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: 27. Under the scheme, it is contemplated that over the period of an Investor's involvement there will be assessable income derived by way of distributions of the net income of the Fund. As interest will be deductible under section 8-1 of the ITAA 1997, section 51AAA of the ITAA 1936 has no application to an Investor. | Section 82KL: 28. 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: 29. 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) 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: 30. Under section 328-110, an Investor carrying on a business in an income year will be a small business entity for that year (the current year) if: | The eligible service period for the purposes of Subdivision H: 31. The prepaid interest charges on the Limited Recourse 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 the making available of a loan principal is to be taken, for the purposes of Subdivision H, to be expenditure incurred under an agreement in return for the doing of a thing under the agreement for the period to which the interest payment relates. The eligible service period in relation to a payment of loan interest is determined by reference to the period to which the interest relates, which is 12 months, and not to the period of the loan. | Sections 82KZME and 82KZMF - prepaid expenditure and tax shelter arrangements: 32. 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. 33. For the purposes of section 82KZME of the ITAA 1936, 'agreements' are broadly defined to include an entire arrangement of which a contract may form part. Under subsection 82KZME(4), the relevant 'agreement' includes all the contractual arrangements and activities associated with the participation in the agreement, including the financing and management arrangements. 34. 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 Limited Recourse Investment Loan, from the operation of section 82KZMF of the ITAA 1936 as: 35. Deductibility of expenditure must therefore be considered under the prepayment rules outlined in paragraphs 36 to 41 of this Ruling. | Section 82KZM - prepaid expenditure incurred by small business entities and individuals incurring non-business expenditure: 36. Section 82KZM of the ITAA 1936 operates to spread over more than one income year a deduction for prepaid expenditure incurred by a taxpayer that is either: 37. 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. 38. As the eligible service period in relation to a deductible interest payment under a Limited Recourse 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 a Limited Recourse Investment Loan. | Sections 82KZMA and 82KZMD - prepaid non-business expenditure incurred by non-individuals and non-small business entities: 39. 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. 40. The expenditure must not be excluded expenditure and must be incurred in return for the doing of a thing under an agreement that is not wholly done within the expenditure year. 41. For these Investors, the deduction for prepaid interest on the Limited Recourse Investment Loan will be apportioned over the relevant interest payment period. | Division 110 - cost base of the Put Option: 42. The cost of capital protection is not deductible to an Investor under section 8-1. Under the terms of the Limited Recourse Investment Loan and the Product Disclosure Statement, an Investor only has the unconditional right to invoke the capital protection at the Maturity Date. Therefore, the income tax legislation applies as if there was a single Put Option for the period ending at the Maturity Date (subsection 247-25(2)). The Put Option constitutes a CGT asset, and is separate and in addition to the other rights created under the scheme as described in this Ruling. 43. The total cost of capital protection under Division 247 will be included in the first element of the cost base (under subsection 110-25(2)) and the reduced cost base (under subsection 110-55(2)) of the Put Option. 44. An Investor will be taken to exercise the Put Option if they redeem their units in the Westpac Enhance Trust, and the redemption proceeds will not fully repay the balance of the Limited Recourse Investment Loan. The limited recourse provisions of the loan will then come into effect, which will amount to invoking the capital protection (subsection 247-30(1)). If the Investor exercises the Put Option, the Investor will include the payment they are deemed to have made to acquire the Put Option in the second element of the cost base and the reduced cost base of their units in the Westpac Enhance Trust pursuant to item 2 of the table in subsection 134-1(1). Any capital gain or capital loss the Investor makes from exercising the Put Option will be disregarded under subsection 134-1(4). 45. The limited recourse provisions of the loan mean that Westpac will have no recourse against the Investor to recover the shortfall between the redemption proceeds and the balance of the Limited Recourse Investment Loan. In this circumstance, the Investor will need to reduce the cost base (under subsection 110-45(3)) and the reduced cost base (under subsection 110-55(6)) of their units by the amount of the shortfall. The combined effect will be to give rise to a capital loss equal to, at the very least, the reduced cost base of the Put Option. 46. If an Investor does not exercise the Put Option, the Put Option will be taken to have expired (subsection 247-30(2)). An Investor will be taken to have not exercised the Put Option where they redeem their units and the redemption proceeds will fully repay the balance of the Limited Recourse Investment Loan. 47. Where the 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: 48. The Limited Recourse Investment Loan is a commercial debt under section 245-10. 49. Where the limited recourse provisions of the Limited Recourse 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). 50. 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. 51. 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 Limited Recourse 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. 52. The value of the Limited Recourse 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): 53. Under subsection 245-60(1), the value of the Limited Recourse 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. 54. The Limited Recourse Investment Loan is a 'moneylending 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. 55. 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 Westpac Enhance Trust) will be the redemption price of the units at the time of the forgiveness. 56. Therefore, as the value of the Limited Recourse 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)). 57. 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 Limited Recourse Investment Loan come into effect. | Section 25-25 - Loan Establishment Fee: 58. The Loan Establishment Fee, if applicable, incurred by an Investor upon successful application for a Limited Recourse 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: | Subsection 159GP(1) - a Unit in the Fund is not a 'security': 59. 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 and the unit holder under which there is a liability to pay an amount, and on the facts, the contract is found to be debt like (see paragraphs 4(ii) and 34 to 39 of Taxation Ruling TR 96/14). 60. A unit in the Fund is not considered to be a contract between the Trustee and the unit holder, nor are the obligations between the Trustee 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. | Part IVA: 61. 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 17 to 21 of this Ruling), it is accepted that the scheme is an ordinary commercial transaction and that Part IVA of the ITAA 1936 will not apply.


What this Ruling is about | NOT LEGALLY BINDING SECTION: | A public ruling is an expression of the Commissioner's opinion about the way in which a relevant provision applies, or would apply, to entities generally or to a class of entities in relation to a particular scheme or a class of schemes. | If you rely on this ruling, the Commissioner must apply the law to you in the way set out in the ruling (unless the Commissioner is satisfied that the ruling is incorrect and disadvantages you, in which case the law may be applied to you in a way that is more favourable for you - provided the Commissioner is not prevented from doing so by a time limit imposed by the law). You will be protected from having to pay any underpaid tax, penalty or interest in respect of the matters covered by this ruling if it turns out that it does not correctly state how the relevant provision applies to you. | Participants must form their own view about the commercial and financial viability of the product. The Commissioner recommends a financial (or other) adviser be consulted for such information. | This Product Ruling provides certainty for participants by confirming that the tax benefits set out in the Ruling part of this document are available, provided that the scheme is carried out in accordance with the information we have been given, and have described below in the Scheme part of this document. If the scheme is not carried out as described, participants lose the protection of this Product Ruling. | S & P/ASX 200 Classes Linked to the performance of Australian equity market through the S&P/ASX 200 Index (the S&P/ASX 200 Index ) | Australia A Units Australia B Units | China Classes Linked to the performance of the trading price of units in the Hang Seng H-share index exchange traded fund (ETF), which has an investment objective to track (before fees and expenses) the performance of the Hang Seng China Enterprises Index (the HSCE Index ) | China A Units China B Units | Division 110 - cost base of the Put Options | Appendix 2 - Detailed contents list


Related rulings: TR 95/33 TR 96/14
Legislative references: ITAA 1936 51(1) 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 159GP(1) ITAA 1936 Pt III Div 3 Subdiv H ITAA 1936 Pt III Div 6 ITAA 1936 Pt IVA ITAA 1997 ITAA 1997 8-1 ITAA 1997 25-25 ITAA 1997 104-25 ITAA 1997 104-25(1)(c) ITAA 1997 109-10 ITAA 1997 Div 110 ITAA 1997 110-25(2) ITAA 1997 110-25(4) ITAA 1997 110-25(4)(a) ITAA 1997 110-45(1B) ITAA 1997 110-55(2) ITAA 1997 110-55(3) ITAA 1997 Subdiv 115-A ITAA 1997 115-25(1) ITAA 1997 134-1(1) ITAA 1997 134-1(4) ITAA 1997 Div 230 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 272-5(3) ITAA 1997 Subdiv 328-C ITAA 1997 328-110 ITAA 1997 328-110(1) TAA 1953 Copyright Act 1968 SISA 1993
Subject references: capital protected borrowing financial products interest expense interest income prepaid expenses product rulings public rulings taxation administration