Product Ruling PR 2014/9
Date of effect: 4 June 2014

What this ruling is about: 1. This Product Ruling sets out the Commissioner's opinion on the way in which the relevant provisions identified in the Ruling section apply to the defined class of entities who take part in the scheme to which this Ruling relates. All legislative references in this Ruling are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise indicated. 2. In this Product Ruling the scheme is referred to as the UBS Structured Option and Loan Facility (UBS SOLF) offered by both UBS AG, Australia Branch and UBS Investments Australia Pty Limited (together, and for the purposes of this Product Ruling, referred to as UBS) and issued under the UBS Structured Option and Loan Facility Product Disclosure Statement (PDS). 3. This Product Ruling does not address: 4. Subject to paragraph 3 of this Product Ruling, this Ruling addresses the taxation consequences associated with the following scenarios: Class of entities 5. This part of the Product Ruling specifies which entities can rely on the Ruling section of this Product Ruling and which entities cannot rely on the Ruling section. In this Product Ruling, those entities that can rely on the Ruling section are referred to as the investor. 6. The class of entities who can rely on the Ruling section of this Product Ruling consists of those entities that are accepted to participate in the scheme specified below on or after the date this Ruling is made and on or before 30 June 2017. They must have a purpose of remaining in the scheme until it is completed (that is, being a party to the relevant agreements until their term expires), and deriving assessable income (other than capital gains) from the investment that exceeds the deductible expenditure incurred in connection with the investment. 7. The class of entities who can rely on the Ruling section of this Product Ruling does not include entities that: Superannuation Industry (Supervision) Act 1993 8. 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 9. 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 17 to 21 of this Ruling. 10. 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: 5. This part of the Product Ruling specifies which entities can rely on the Ruling section of this Product Ruling and which entities cannot rely on the Ruling section. In this Product Ruling, those entities that can rely on the Ruling section are referred to as the investor. 6. The class of entities who can rely on the Ruling section of this Product Ruling consists of those entities that are accepted to participate in the scheme specified below on or after the date this Ruling is made and on or before 30 June 2017. They must have a purpose of remaining in the scheme until it is completed (that is, being a party to the relevant agreements until their term expires), and deriving assessable income (other than capital gains) from the investment that exceeds the deductible expenditure incurred in connection with the investment. 7. The class of entities who can rely on the Ruling section of this Product Ruling does not include entities that: | Superannuation Industry (Supervision) Act 1993: 8. 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: 9. 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 17 to 21 of this Ruling. 10. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then: 11. This Product Ruling applies prospectively from 4 June 2014, the date it is published. It therefore applies only to the specified class of entities that enter into the scheme from 4 June 2014 until 30 June 2017, being its period of application. This Product Ruling will continue to apply to those entities even after its period of application has ended for the scheme entered into during the period of application. 12. However the Product Ruling only applies to the extent that there is no change in the scheme or in the entity's involvement in the scheme. | Changes in the law: 13. Although this Product Ruling deals with the income tax laws enacted at the time it was issued, later amendments may impact on this Product Ruling. Any such changes will take precedence over the application of this Product Ruling and, to that extent, this Product Ruling will have no effect. 14. Entities who are considering participating in the scheme are advised to confirm with their taxation adviser that changes in the law have not affected this Product Ruling since it was issued. | Note to promoters and advisers: 15. Product Rulings were introduced for the purpose of providing certainty about tax consequences for entities in schemes such as this. In keeping with that intention the Commissioner suggests that promoters and advisers ensure that participants are fully informed of any legislative changes after the Product Ruling has issued. 16. Subject to paragraph 3 of this Ruling and the assumptions in paragraph 21 of this Ruling: 17. The scheme that is the subject of this Ruling is identified and described in the following documents: 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. For the purposes of describing the scheme to which this Ruling applies, there are no other agreements, whether formal or informal, and whether or not legally enforceable, which an investor, or any associate of an investor, will be a party to, which are a part of the scheme. Unless otherwise defined, capitalised terms in this Product Ruling take their meaning as per the draft PDS and draft Security Trust Deed referred to in paragraph 17 of this Product Ruling. 19. All Australian Securities and Investments Commission (ASIC) requirements are, or will be, complied with for the term of the agreements. 20. Following is a summary of the scheme: | Assumptions: 21. This Ruling is made on the basis of the following necessary assumptions: Commissioner of Taxation 4 June 2014 | Section 8-1 and Division 247 - capital protected borrowings and deductibility of interest: 22. The interest paid on a borrowing used to acquire income producing assets such as the Underlying Securities is generally treated as deductible under section 8-1 where it is expected that dividends, trust distributions 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. 23. Division 247 limits the allowable deductions for expenditure incurred under a 'capital protected borrowing'. Broadly, a capital protected borrowing arises where an amount is borrowed under an arrangement where the borrower is protected against the fall in value of some specified securities, and where that borrowing is made for the purpose of investing in those securities. 24. Division 247 applies to the Principal Loan where the investor uses the Principal Loan to acquire a beneficial interest in the Underlying Securities and the investor is protected against the fall in the market value of those Underlying Securities. 25. Division 247 sets out a methodology for reasonably attributing the cost of capital protection incurred by a borrower under a capital protected borrowing (section 247-20). Division 247 ignores any amount which is not in substance for capital protection or interest in calculating the cost of capital protection, pursuant to subsection 247-20(3). 26. Where the investor has a Principal Loan and does not acquire a Related Option: 27. Where the cost of the Related Option that is a Put Option or Collar is factored into the Interest Rate charged on the Principal Loan; or the investor pays the First Premium Amount as an upfront lump sum: 28. Where an investor has acquired a Portfolio or a Basket and UBS has applied a single Interest Rate to the Principal Loan, the investment will be treated as one arrangement for the purposes of Division 247. 29. There is no element of capital protection connected with the Supplementary Loan. No part of the Interest incurred by the investor on the Supplementary Loan for the income year will therefore be attributable to the cost of capital protection and the Interest on the Supplementary Loan will be deductible under section 8-1 to the extent the Supplementary Loan is applied to fund Interest on the Principal Loan. | Section 51AAA: 30. By acquiring the Underlying Securities, it is contemplated that an investor will derive assessable income by way of the receipt of dividend income and/or trust income and capital gains. As Interest incurred on the Principal Loan and Supplementary Loan 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 who enters into a Transaction under the Loan Facility. | Section 82KL: 31. The operation of section 82KL of the ITAA 1936 depends, among other things, on the identification of a certain quantum of 'additional benefits'. Insufficient additional benefits will be provided to trigger the application of section 82KL. 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: 32. 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 the carrying on of a business, whether the investor is a small business entity, whether the investor is an individual and whether the investor is not an individual and incurs the expenditure otherwise than in carrying on a business. This Subdivision does not apply to 'excluded expenditure' which is defined in subsection 82KZL(1) of the ITAA 1936 to include amounts of less than $1,000 or amounts that are of a capital nature. | Subdivision 328-C - small business entities: 33. 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: 34. The Interest charged on the Principal Loan and the Supplementary Loan that is deductible under section 8-1 of the ITAA 1997 is 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 and not to the period of the loan. | Sections 82KZME and 82KZMF - prepaid expenditure and 'tax shelter' style arrangements: 35. 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' style arrangement for the doing of a thing that is not to be wholly done within the expenditure year. 36. For the purposes of section 82KZME of the ITAA 1936, 'agreements' are broadly defined to include an entire scheme of which a contract may form part. Under subsection 82KZME(4) of the ITAA 1936, the relevant agreement is all the contractual arrangements and activities associated with participation in the UBS SOLF, including the financing, Underlying Securities acquisition and Underlying Securities disposal arrangements. 37. Exception 1, as contained in subsection 82KZME(5) of the ITAA 1936, applies to exclude Interest payable under the Principal Loan and Supplementary Loan from the operation of section 82KZMF of the ITAA 1936 where: 38. Deductibility of the prepaid Interest must therefore be considered under the prepayment rules contained in paragraphs 39 to 44 of this Product Ruling. | Section 82KZM - prepaid expenditure incurred by certain small business entities and individuals incurring non-business expenditure: 39. 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: 40. The expenditure must not be excluded expenditure. 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. 41. As the eligible service period in relation to the deductible Interest payment under the Principal Loan and Supplementary Loan is not more than 12 months and does not end after the last day of the year of income after the one in which the expenditure was incurred, section 82KZM of the ITAA 1936 will have no application to investors who are a small business entity for the year of income that have not chosen to apply section 82KZMD of the ITAA 1936 to the expenditure, or to investors who are individuals where the expenditure is not incurred in carrying on a business. Investors who satisfy these tests will be able to claim an immediate deduction allowable under section 8-1 of the ITAA 1997 for the Interest incurred under the Principal Loan and Supplementary Loan. | Sections 82KZMA and 82KZMD - prepaid non-business expenditure incurred by non-individual and non-small business entities: 42. Sections 82KZMA and 82KZMD of the ITAA 1936 set the amount and timing of deductions for expenditure for an investor (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. 43. The expenditure must not be excluded expenditure and must be incurred in return for the doing of a thing under an agreement that is not to be wholly done within the expenditure year. 44. For these investors, the amount of prepaid Interest incurred under the Principal Loan and Supplementary Loan which is allowable as a deduction under section 8-1 will be apportioned over the relevant interest payment period. | Parts 3-1 and 3-3 - application of CGT provisions to the Put Option, Collar and Underlying Securities: 45. For the purposes of Parts 3-1 and 3-3 (about capital gains and losses), paragraph 106-60(1)(a) ignores the vesting of a CGT asset in a security holder where the vesting is for the purpose of enforcing, giving effect to or maintaining a security, charge or encumbrance over the asset, and the security, charge or encumbrance remains over the asset just after the vesting. 46. A transfer of the Underlying Securities and/or Put Option or Collar by the investor (the security provider) to the Nominee (the security holder) constitutes a vesting of those CGT assets in the Nominee for the purpose of giving effect to a security over the assets and that security will remain over the Underlying Securities and/or Put Option or Collar 'just after the vesting'. As paragraph 106-60(1)(a) will ignore the vesting of the Underlying Securities and/or Put Option or Collar in the Nominee upon their transfer by the investor to the Nominee, those assets will, for the purposes of Parts 3-1 and 3-3, be treated as though they continue to be owned by the investor. 47. If an investor procures a Principal Loan without a Related Option and the limited recourse provisions of the Principal Loan are invoked at Maturity, the investor will dispose of the Underlying Securities and CGT event A1 will arise for the investor in respect of the disposal (section 104-10). Under item 2 of the table in subsection 134-1(1), the investor's cost base and reduced cost base in the Underlying Securities for these purposes will include the amount reasonably attributable to the cost of capital protection (if any) as per paragraph 16(a)(ii) of this Product Ruling. Any capital gain or capital loss on exercise of the put option referred to in paragraph 16(a)(iii) of this Product Ruling will be disregarded (subsection 134-1(4)). 48. If an investor's Put Option or Collar is exercised and physically settled, the investor will dispose of the Underlying Securities and CGT event A1 will arise for the investor in respect of the disposal (section 104-10). Under item 2 of the table in subsection 134-1(1), the investor's cost base and reduced cost base in the Underlying Securities for these purposes will include the additional amount (if any) as per paragraph 16(b)(ii) or 16(c)(ii) of this Product Ruling, plus any Facility Adjustment Fee and First Premium Amount paid. Any capital gain or capital loss on exercise of the Put Option or Collar will be disregarded (subsection 134-1(4)). 49. If an investor's Put Option or Collar is exercised and Cash Settled, CGT event C2 will arise for the investor in respect of the exercise of the Put Option or Collar (section 104-25). The cost base and reduced cost base of the Put Option or Collar will include the additional amount (if any) as per paragraph 16(b)(ii) or 16(c)(ii) of this Product Ruling, plus any Facility Adjustment Fee and First Premium Amount paid - sections 110-25 and 110-55. No CGT event will occur in relation to the Underlying Securities. 50. Where an investor procures a Principal Loan without a Related Option and the limited recourse provisions of the Principal Loan are not invoked at Maturity, CGT event C2 will arise for the investor in relation to the put option referred to in paragraph 16(a)(iii) of this Product Ruling (section 104-25). As the investor will not receive any capital proceeds in respect of the expiry of this put option, a capital loss will be made by the investor in this regard, equal to the investor's reduced cost base in the put option. Under section 110-55, the reduced cost base of this put option will include the amount reasonably attributable to the cost of capital protection (if any) as per paragraph 16(a)(ii) of this Product Ruling. 51. Where the Put Option or Collar expire unexercised, CGT event C2 will arise for the investor in relation to the Put Option or Collar at that time (section 104-25). As the investor will not receive any capital proceeds in respect of the expiry of the Put Option or Collar, a capital loss will be made by the investor in this regard, equal to the investor's reduced cost base in the Put Option or Collar. Under section 110-55, the reduced cost base of the Put Option or Collar will include: 52. Under section 110-25 and 110-55 respectively, the investor's cost base and reduced cost base in the Underlying Securities acquired by the investor under the UBS SOLF will include the amount of the Principal Loan used to finance the acquisition of the Underlying Securities, their Capital Contribution (if any) and incidental costs incurred by the investor in acquiring and disposing of the Underlying Securities (this includes stamp duty and costs of transfer). As per paragraphs 47 and 48 of this Product Ruling, where the limited recourse provisions of the Principal Loan are invoked or the investor's Put Option or Collar is exercised and physically settled, the investor's cost base and reduced cost base in the Underlying Securities also includes the cost base or reduced cost base of the put option referred to in paragraph 16(a)(iii) of this Product Ruling, the Put Option or the Collar (as applicable). 53. Division 115 allows a taxpayer a discount on capital gains in certain circumstances. In accordance with section 115-5, any capital gain realised by an investor on the sale of the Underlying Securities or exercise of the Put Option or Collar under a Cash Settlement will be treated as a discount capital gain where the investor is an individual, a complying superannuation entity or a trust and has held the Underlying Securities, Put Option or Collar for more than 12 months (excluding the days of acquisition and disposal). | Division 230 - taxation of financial arrangements: 54. Division 230 of the ITAA 1997 sets out the tax treatment of gains or losses from a 'financial arrangement'. Where an arrangement is not a qualifying security for the purposes of Division 16E of the ITAA 1936 and an election under section 230-455 to have Division 230 of the ITAA 1997 apply to financial arrangements has not been made, then pursuant to section 230-455 of the ITAA 1997, Division 230 of the ITAA 1997 does not apply in relation to gains or losses from a financial arrangement held by: | Assessability of dividends applied against Loans: 55. Pursuant to the assumption at paragraph 21(l) of this Product Ruling, where an investor directs that any dividends or distributions paid in respect of the Underlying Securities be applied toward repayment of principal or payment of Interest on the Principal Loan and/or any Supplementary Loan, the investor will be assessable on those dividends or distributions under section 97 of the ITAA 1936. | Division 770 - foreign income tax offsets: 56. Division 770 allows a non-refundable tax offset for an income year for foreign income tax paid where that amount of foreign income tax is paid in respect of an amount that is included in your assessable income for the year. 57. To the extent that the investor has paid, or is deemed to have paid, foreign income tax (such as withholding tax at source): | Part IVA - anti-avoidance: 58. Provided that the scheme ruled on is entered into and carried out as described in this Ruling, it is accepted that the scheme is an ordinary commercial transaction and Part IVA of the ITAA 1936 will not apply. 59. 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 section apply to the defined class of entities who take part in the scheme to which this Ruling relates. All legislative references in this Ruling are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise indicated. 2. In this Product Ruling the scheme is referred to as the UBS Structured Option and Loan Facility (UBS SOLF) offered by both UBS AG, Australia Branch and UBS Investments Australia Pty Limited (together, and for the purposes of this Product Ruling, referred to as UBS) and issued under the UBS Structured Option and Loan Facility Product Disclosure Statement (PDS). 3. This Product Ruling does not address: 4. Subject to paragraph 3 of this Product Ruling, this Ruling addresses the taxation consequences associated with the following scenarios: | Class of entities: 5. This part of the Product Ruling specifies which entities can rely on the Ruling section of this Product Ruling and which entities cannot rely on the Ruling section. In this Product Ruling, those entities that can rely on the Ruling section are referred to as the investor. 6. The class of entities who can rely on the Ruling section of this Product Ruling consists of those entities that are accepted to participate in the scheme specified below on or after the date this Ruling is made and on or before 30 June 2017. They must have a purpose of remaining in the scheme until it is completed (that is, being a party to the relevant agreements until their term expires), and deriving assessable income (other than capital gains) from the investment that exceeds the deductible expenditure incurred in connection with the investment. 7. The class of entities who can rely on the Ruling section of this Product Ruling does not include entities that: | Superannuation Industry (Supervision) Act 1993: 8. 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: 9. 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 17 to 21 of this Ruling. 10. 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 - capital protected borrowings and deductibility of interest: 22. The interest paid on a borrowing used to acquire income producing assets such as the Underlying Securities is generally treated as deductible under section 8-1 where it is expected that dividends, trust distributions 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. 23. Division 247 limits the allowable deductions for expenditure incurred under a 'capital protected borrowing'. Broadly, a capital protected borrowing arises where an amount is borrowed under an arrangement where the borrower is protected against the fall in value of some specified securities, and where that borrowing is made for the purpose of investing in those securities. 24. Division 247 applies to the Principal Loan where the investor uses the Principal Loan to acquire a beneficial interest in the Underlying Securities and the investor is protected against the fall in the market value of those Underlying Securities. 25. Division 247 sets out a methodology for reasonably attributing the cost of capital protection incurred by a borrower under a capital protected borrowing (section 247-20). Division 247 ignores any amount which is not in substance for capital protection or interest in calculating the cost of capital protection, pursuant to subsection 247-20(3). 26. Where the investor has a Principal Loan and does not acquire a Related Option: 27. Where the cost of the Related Option that is a Put Option or Collar is factored into the Interest Rate charged on the Principal Loan; or the investor pays the First Premium Amount as an upfront lump sum: 28. Where an investor has acquired a Portfolio or a Basket and UBS has applied a single Interest Rate to the Principal Loan, the investment will be treated as one arrangement for the purposes of Division 247. 29. There is no element of capital protection connected with the Supplementary Loan. No part of the Interest incurred by the investor on the Supplementary Loan for the income year will therefore be attributable to the cost of capital protection and the Interest on the Supplementary Loan will be deductible under section 8-1 to the extent the Supplementary Loan is applied to fund Interest on the Principal Loan. | Section 51AAA: 30. By acquiring the Underlying Securities, it is contemplated that an investor will derive assessable income by way of the receipt of dividend income and/or trust income and capital gains. As Interest incurred on the Principal Loan and Supplementary Loan 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 who enters into a Transaction under the Loan Facility. | Section 82KL: 31. The operation of section 82KL of the ITAA 1936 depends, among other things, on the identification of a certain quantum of 'additional benefits'. Insufficient additional benefits will be provided to trigger the application of section 82KL. 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: 32. 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 the carrying on of a business, whether the investor is a small business entity, whether the investor is an individual and whether the investor is not an individual and incurs the expenditure otherwise than in carrying on a business. This Subdivision does not apply to 'excluded expenditure' which is defined in subsection 82KZL(1) of the ITAA 1936 to include amounts of less than $1,000 or amounts that are of a capital nature. | Subdivision 328-C - small business entities: 33. 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: 34. The Interest charged on the Principal Loan and the Supplementary Loan that is deductible under section 8-1 of the ITAA 1997 is 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 and not to the period of the loan. | Sections 82KZME and 82KZMF - prepaid expenditure and 'tax shelter' style arrangements: 35. 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' style arrangement for the doing of a thing that is not to be wholly done within the expenditure year. 36. For the purposes of section 82KZME of the ITAA 1936, 'agreements' are broadly defined to include an entire scheme of which a contract may form part. Under subsection 82KZME(4) of the ITAA 1936, the relevant agreement is all the contractual arrangements and activities associated with participation in the UBS SOLF, including the financing, Underlying Securities acquisition and Underlying Securities disposal arrangements. 37. Exception 1, as contained in subsection 82KZME(5) of the ITAA 1936, applies to exclude Interest payable under the Principal Loan and Supplementary Loan from the operation of section 82KZMF of the ITAA 1936 where: 38. Deductibility of the prepaid Interest must therefore be considered under the prepayment rules contained in paragraphs 39 to 44 of this Product Ruling. | Section 82KZM - prepaid expenditure incurred by certain small business entities and individuals incurring non-business expenditure: 39. 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: 40. The expenditure must not be excluded expenditure. 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. 41. As the eligible service period in relation to the deductible Interest payment under the Principal Loan and Supplementary Loan is not more than 12 months and does not end after the last day of the year of income after the one in which the expenditure was incurred, section 82KZM of the ITAA 1936 will have no application to investors who are a small business entity for the year of income that have not chosen to apply section 82KZMD of the ITAA 1936 to the expenditure, or to investors who are individuals where the expenditure is not incurred in carrying on a business. Investors who satisfy these tests will be able to claim an immediate deduction allowable under section 8-1 of the ITAA 1997 for the Interest incurred under the Principal Loan and Supplementary Loan. | Sections 82KZMA and 82KZMD - prepaid non-business expenditure incurred by non-individual and non-small business entities: 42. Sections 82KZMA and 82KZMD of the ITAA 1936 set the amount and timing of deductions for expenditure for an investor (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. 43. The expenditure must not be excluded expenditure and must be incurred in return for the doing of a thing under an agreement that is not to be wholly done within the expenditure year. 44. For these investors, the amount of prepaid Interest incurred under the Principal Loan and Supplementary Loan which is allowable as a deduction under section 8-1 will be apportioned over the relevant interest payment period. | Parts 3-1 and 3-3 - application of CGT provisions to the Put Option, Collar and Underlying Securities: 45. For the purposes of Parts 3-1 and 3-3 (about capital gains and losses), paragraph 106-60(1)(a) ignores the vesting of a CGT asset in a security holder where the vesting is for the purpose of enforcing, giving effect to or maintaining a security, charge or encumbrance over the asset, and the security, charge or encumbrance remains over the asset just after the vesting. 46. A transfer of the Underlying Securities and/or Put Option or Collar by the investor (the security provider) to the Nominee (the security holder) constitutes a vesting of those CGT assets in the Nominee for the purpose of giving effect to a security over the assets and that security will remain over the Underlying Securities and/or Put Option or Collar 'just after the vesting'. As paragraph 106-60(1)(a) will ignore the vesting of the Underlying Securities and/or Put Option or Collar in the Nominee upon their transfer by the investor to the Nominee, those assets will, for the purposes of Parts 3-1 and 3-3, be treated as though they continue to be owned by the investor. 47. If an investor procures a Principal Loan without a Related Option and the limited recourse provisions of the Principal Loan are invoked at Maturity, the investor will dispose of the Underlying Securities and CGT event A1 will arise for the investor in respect of the disposal (section 104-10). Under item 2 of the table in subsection 134-1(1), the investor's cost base and reduced cost base in the Underlying Securities for these purposes will include the amount reasonably attributable to the cost of capital protection (if any) as per paragraph 16(a)(ii) of this Product Ruling. Any capital gain or capital loss on exercise of the put option referred to in paragraph 16(a)(iii) of this Product Ruling will be disregarded (subsection 134-1(4)). 48. If an investor's Put Option or Collar is exercised and physically settled, the investor will dispose of the Underlying Securities and CGT event A1 will arise for the investor in respect of the disposal (section 104-10). Under item 2 of the table in subsection 134-1(1), the investor's cost base and reduced cost base in the Underlying Securities for these purposes will include the additional amount (if any) as per paragraph 16(b)(ii) or 16(c)(ii) of this Product Ruling, plus any Facility Adjustment Fee and First Premium Amount paid. Any capital gain or capital loss on exercise of the Put Option or Collar will be disregarded (subsection 134-1(4)). 49. If an investor's Put Option or Collar is exercised and Cash Settled, CGT event C2 will arise for the investor in respect of the exercise of the Put Option or Collar (section 104-25). The cost base and reduced cost base of the Put Option or Collar will include the additional amount (if any) as per paragraph 16(b)(ii) or 16(c)(ii) of this Product Ruling, plus any Facility Adjustment Fee and First Premium Amount paid - sections 110-25 and 110-55. No CGT event will occur in relation to the Underlying Securities. 50. Where an investor procures a Principal Loan without a Related Option and the limited recourse provisions of the Principal Loan are not invoked at Maturity, CGT event C2 will arise for the investor in relation to the put option referred to in paragraph 16(a)(iii) of this Product Ruling (section 104-25). As the investor will not receive any capital proceeds in respect of the expiry of this put option, a capital loss will be made by the investor in this regard, equal to the investor's reduced cost base in the put option. Under section 110-55, the reduced cost base of this put option will include the amount reasonably attributable to the cost of capital protection (if any) as per paragraph 16(a)(ii) of this Product Ruling. 51. Where the Put Option or Collar expire unexercised, CGT event C2 will arise for the investor in relation to the Put Option or Collar at that time (section 104-25). As the investor will not receive any capital proceeds in respect of the expiry of the Put Option or Collar, a capital loss will be made by the investor in this regard, equal to the investor's reduced cost base in the Put Option or Collar. Under section 110-55, the reduced cost base of the Put Option or Collar will include: 52. Under section 110-25 and 110-55 respectively, the investor's cost base and reduced cost base in the Underlying Securities acquired by the investor under the UBS SOLF will include the amount of the Principal Loan used to finance the acquisition of the Underlying Securities, their Capital Contribution (if any) and incidental costs incurred by the investor in acquiring and disposing of the Underlying Securities (this includes stamp duty and costs of transfer). As per paragraphs 47 and 48 of this Product Ruling, where the limited recourse provisions of the Principal Loan are invoked or the investor's Put Option or Collar is exercised and physically settled, the investor's cost base and reduced cost base in the Underlying Securities also includes the cost base or reduced cost base of the put option referred to in paragraph 16(a)(iii) of this Product Ruling, the Put Option or the Collar (as applicable). 53. Division 115 allows a taxpayer a discount on capital gains in certain circumstances. In accordance with section 115-5, any capital gain realised by an investor on the sale of the Underlying Securities or exercise of the Put Option or Collar under a Cash Settlement will be treated as a discount capital gain where the investor is an individual, a complying superannuation entity or a trust and has held the Underlying Securities, Put Option or Collar for more than 12 months (excluding the days of acquisition and disposal). | Division 230 - taxation of financial arrangements: 54. Division 230 of the ITAA 1997 sets out the tax treatment of gains or losses from a 'financial arrangement'. Where an arrangement is not a qualifying security for the purposes of Division 16E of the ITAA 1936 and an election under section 230-455 to have Division 230 of the ITAA 1997 apply to financial arrangements has not been made, then pursuant to section 230-455 of the ITAA 1997, Division 230 of the ITAA 1997 does not apply in relation to gains or losses from a financial arrangement held by: | Assessability of dividends applied against Loans: 55. Pursuant to the assumption at paragraph 21(l) of this Product Ruling, where an investor directs that any dividends or distributions paid in respect of the Underlying Securities be applied toward repayment of principal or payment of Interest on the Principal Loan and/or any Supplementary Loan, the investor will be assessable on those dividends or distributions under section 97 of the ITAA 1936. | Division 770 - foreign income tax offsets: 56. Division 770 allows a non-refundable tax offset for an income year for foreign income tax paid where that amount of foreign income tax is paid in respect of an amount that is included in your assessable income for the year. 57. To the extent that the investor has paid, or is deemed to have paid, foreign income tax (such as withholding tax at source): | Part IVA - anti-avoidance: 58. Provided that the scheme ruled on is entered into and carried out as described in this Ruling, it is accepted that the scheme is an ordinary commercial transaction and Part IVA of the ITAA 1936 will not apply.


What this Ruling is about | NOT LEGALLY BINDING SECTION: | A public ruling is an expression of the Commissioner's opinion about the way in which a relevant provision applies, or would apply, to entities generally or to a class of entities in relation to a particular scheme or a class of schemes. | If you rely on this ruling, the Commissioner must apply the law to you in the way set out in the ruling (unless the Commissioner is satisfied that the ruling is incorrect and disadvantages you, in which case the law may be applied to you in a way that is more favourable for you - provided the Commissioner is not prevented from doing so by a time limit imposed by the law). You will be protected from having to pay any underpaid tax, penalty or interest in respect of the matters covered by this ruling if it turns out that it does not correctly state how the relevant provision applies to you. | Potential participants must form their own view about the commercial and financial viability of the product. The Commissioner recommends a financial (or other) adviser be consulted for such information. | This Product Ruling provides certainty for potential participants by confirming that the tax benefits set out in the Ruling part of this document are available, provided that the scheme is carried out in accordance with the information we have been given, and have described below in the Scheme part of this document. If the scheme is not carried out as described, participants lose the protection of this Product Ruling. | Appendix 2 - Detailed contents list


Related rulings: TR 95/33
Legislative references: 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)(ii) ITAA 1936 82KZME(5)(b)(iii) ITAA 1936 82KZMF ITAA 1936 97 ITAA 1936 97(1)(a) ITAA 1936 Pt III Div 16E ITAA 1936 Pt IVA ITAA 1997 ITAA 1997 8-1 ITAA 1997 Pt 3-1 ITAA 1997 Pt 3-3 ITAA 1997 104-10 ITAA 1997 104-25 ITAA 1997 104-25(1)(c) ITAA 1997 104-25(1)(e) ITAA 1997 104-25(3) ITAA 1997 106-60(1)(a) ITAA 1997 109-5 ITAA 1997 110-25 ITAA 1997 110-55 ITAA 1997 Div 115 ITAA 1997 115-5 ITAA 1997 134-1(1) ITAA 1997 134-1(4) ITAA 1997 Div 230 ITAA 1997 230-455 ITAA 1997 230-455(7) ITAA 1997 Div 247 ITAA 1997 247-20 ITAA 1997 247-20(3) ITAA 1997 247-20(4) ITAA 1997 247-20(5) ITAA 1997 247-20(5A) ITAA 1997 247-20(6) ITAA 1997 Subdiv 328-C ITAA 1997 328-110 ITAA 1997 328-110(1) ITAA 1997 Div 770 ITAA 1997 770-15 ITAA 1997 770-75 ITAA 1997 770-130 SISA 1993 TAA 1953
Subject references: capital gains tax capital protected borrowings financial products foreign income tax offset interest expenses limited recourse loan prepaid expenses product rulings public rulings put options taxation administration