Product Ruling PR 2008/71
Date of effect: 5 November 2008

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 (below) 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. Next Financial Instalments - Series NF 330 (Next Financial Instalments or Instalments) are an investment comprising the borrowing of moneys on limited recourse terms from a wholly-owned subsidiary of Next Financial Limited (Next Financial): 3. In this Product Ruling the scheme is an investment in Next Financial Instalments where the shares, units and/or stapled securities forming part of the Underlying Securities are listed for quotation on the Australian Securities Exchange (ASX). 4. The Ruling does not address: Class of entities 5. This part of the Product Ruling specifies which entities can rely on the tax benefits set out in the Ruling section of this Product Ruling and which entities cannot rely on those tax benefits. In this Product Ruling, those entities that can rely on the tax benefits set out in this Ruling are referred to as Investors. 6. The class of entities who can rely on those tax benefits consists of entities that are accepted to participate in the scheme specified below on or after the date this Product Ruling is made and on or before 30 June 2012. They must have a purpose of staying in the scheme until it is completed (that is, being a party to the relevant agreements mentioned in paragraph 21 of this Ruling until their term expires), and deriving assessable income from this involvement. 7. 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 8. 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 9. 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 21 to 26 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 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: 5. This part of the Product Ruling specifies which entities can rely on the tax benefits set out in the Ruling section of this Product Ruling and which entities cannot rely on those tax benefits. In this Product Ruling, those entities that can rely on the tax benefits set out in this Ruling are referred to as Investors. 6. The class of entities who can rely on those tax benefits consists of entities that are accepted to participate in the scheme specified below on or after the date this Product Ruling is made and on or before 30 June 2012. They must have a purpose of staying in the scheme until it is completed (that is, being a party to the relevant agreements mentioned in paragraph 21 of this Ruling until their term expires), and deriving assessable income from this involvement. 7. 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: 8. 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: 9. 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 21 to 26 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 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: 12. This Product Ruling applies prospectively from 5 November 2008, the date this Product Ruling is made. It therefore applies only to the specified class of entities that enter into the scheme from 5 November 2008 until 30 June 2012, 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. 13. However the Product Ruling only applies to the extent that: 14. 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)). 15. 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: 16. 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: 17. 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 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. This change will affect the benchmark interest rate referred to in this Product Ruling. 18. Although this Product Ruling deals with the laws enacted at the time it was issued, later amendments to the law may impact on this Product ruling. Any such changes will take precedence over the application of this Product Ruling and, to the extent of those amendments, this Product Ruling will be superseded. 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: 19. 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. 20. Subject to paragraph 4 and the assumptions in paragraph 26 of this Ruling: 21. 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. 22. 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. 23. In this Ruling, unless otherwise defined, capitalised terms take their meaning as per the documents listed in paragraph 21 of this Ruling. 24. All Australian Securities and Investment Commission (ASIC) requirements are, or will be, complied with for the term of the agreements. | Overview: 25. Following is a summary of the scheme: | Assumptions: 26. This Ruling is made on the basis of the following necessary assumptions: Commissioner of Taxation 5 November 2008 | Section 8-1 - deductibility of interest and administration fees: 27. The interest paid on a borrowing used to acquire income producing assets such as shares or units in a trust is generally treated as deductible under section 8-1 where it is expected that dividends or other assessable income would be derived from the investment (Taxation Ruling TR 95/33). 28. Administration fees in relation to the management of income producing assets is generally treated as deductible under section 8-1 where it is expected that assessable income would be derived from the investment. | Division 247 - capital protected borrowings: 29. Division 247 applies to the arrangement as a capital protected borrowing (CPB) because the Investor uses the Loan to acquire a beneficial interest in shares, units or stapled securities, or uses such assets as security for the Loan, and the Investor is protected against the fall in the market value of the shares, units or stapled securities for the purposes of section 247-10. 30. Division 247 sets out a methodology for reasonably attributing the cost of capital protection incurred by a borrower under a CPB (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 (subsection 247-20(3)). 31. Under the Next Financial Instalments, the amount reasonably attributable to the cost of capital protection is worked out under the method statement in subsection 247-20(3), as set out in paragraph 20(b) of this Ruling. This amount will be treated as an amount incurred by the Investor for a put option (the 'notional' put option) granted by the Lender, under the arrangement (subsection 247-20(6)). 32. The Investor's 'notional' put option is a capital asset. As the cost of capital protection is the cost of the 'notional' put option, this expense will be capital in nature. The Interest Amount will be deductible under section 8-1 only to the extent that it is not the cost of capital protection. | Section 51AAA: 33. An Investor is expected to derive assessable income over the period of their investment in the Next Financial Instalment by way of the receipt of dividend income and/or other distributions of income, and capital gains obtained on any sale of the Underlying Securities. As the Interest Amount will be 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 acquiring Next Financial Instalments. | Section 82KL: 34. 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: 35. Subdivision H of Division 3 of Part III of the ITAA 1936 (Subdivision H) deals with the timing of deductions for certain advance expenditure incurred under an agreement in return for the doing of a thing under that agreement that will not be wholly done within the same year of income. Separate rules apply depending on whether the expenditure is incurred in carrying on a business, whether the Investor is a small business entity, whether the Investor is an individual and whether the Investor is not an individual and incurs the expenditure otherwise than in carrying on a business. This Subdivision does not apply to 'excluded expenditure' which is defined in subsection 82KZL(1) of the ITAA 1936 to include amounts of less than $1,000, or amounts of expenditure that are of a capital nature. | Subdivision 328-C - small business entity: 36. An Investor will be a small business entity for an income year if the Investor carries on a business in that year and either the aggregated turnover for the year is, or is likely to be, less than $2 million, or the aggregated turnover from a business carried on in the previous income year was less than $2 million. | The eligible service period for the purposes of Subdivision H: 37. The Interest Amount that is an allowable deduction under section 8-1 of the ITAA 1997 is in relation to a prepayment of interest on the Loan. Paragraph 82KZL(2)(a) of the ITAA 1936 provides that a payment of interest that is made in return for the making available of a loan principal is to be taken, for the purposes of Subdivision H of the ITAA 1936, to be expenditure incurred under an agreement in return for the doing of a thing under the agreement for the period to which the interest payment relates. The eligible service period in relation to a payment of interest is determined by reference to the period to which the interest relates, and not to the term of the loan (which may be up to 10 years in the case of the Loan). | Sections 82KZME and 82KZMF - prepaid expenditure and 'tax shelter' arrangements: 38. 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. 39. For the purposes of section 82KZME of the ITAA 1936, 'agreements' are broadly defined to include an entire arrangement of which a contract may form part. Under subsection 82KZME(4) of the ITAA 1936, the relevant 'agreement' is all the contractual arrangements and activities associated with the participation in the Next Financial Instalments, including the financing, purchase, holding and disposal arrangements for the Underlying Securities. 40. Under the arrangement, when an Investor acquires a Next Financial Instalment, they acquire beneficial ownership of the shares, units or stapled securities comprising the Underlying Securities. 41. Exception 1, as contained in subsection 82KZME(5) of the ITAA 1936, applies to exclude the portion of the Interest Amount deductible under section 8-1 of the ITAA 1997 incurred on borrowings under the Next Financial Instalment from the operation of section 82KZMF of the ITAA 1936, as: | Application of sections 82KZME and 82KZMF to prepayment of Administration Fee: 42. The Administration Fee incurred by an Investor meets the requirements of subsections 82KZME(1) and (2) of the ITAA 1936, is incurred under an 'agreement' as described in subsection 82KZME(3) of the ITAA 1936, and does not fall within any of the five exceptions to section 82KZME. Therefore, unless the expenditure is excluded expenditure, the deduction for each year is determined using the formula in subsection 82KZMF(1) of the ITAA 1936. Section 82KZMF of the ITAA 1936 will apportion the deduction for Administration Fees over the eligible service period (that is, the relevant Interest Period). | Section 82KZM - prepaid expenditure incurred by small business entities and individuals incurring non-business expenditure: 43. 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: 44. 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. | Prepayment of interest made at the commencement of annual Interest Periods: 45. That part of the portion of the Interest Amount deductible under section 8-1 of the ITAA 1997 and prepaid from an Investor's own funds at the commencement of an annual Interest Period relates to an eligible service period that is not more than 12 months and which ends on or before the last day of the year of income after the one in which the expenditure was incurred. Therefore, section 82KZM of the ITAA 1936 will have no application to Investors who are small business entities for the year of income that have not chosen for section 82KZMD of the ITAA 1936 to apply, or to Investors who are individual taxpayers and the expenditure is not incurred in carrying on a business. Investors who satisfy these conditions will be able to claim an immediate deduction in respect of that portion of the Interest Amount. | Prepayment of interest made on the Drawdown Date: 46. That part of the portion of the Interest Amount deductible under section 8-1 of the ITAA 1997 and prepaid on the Drawdown Date from a portion of the Loan Amount relates to subsequent annual Interest Periods and, when incurred by an Investor that is either a small business entity for the year of income that has not chosen for section 82KZMD of the ITAA 1936 to apply or an individual taxpayer not carrying on a business, will be apportioned over the eligible service period in accordance with section 82KZM of the ITAA 1936 as the eligible service period for this expenditure is longer than 12 months. | Sections 82KZMA and 82KZMD - prepaid non-business expenditure incurred by taxpayers that are not individuals or small business entities: 47. 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 that has not chosen for section 82KZMD to apply) who is a taxpayer that is not an individual and does not carry on a business. 48. 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. 49. For these Investors, the allowable deduction for the portion of the prepaid Interest Amount deductible under section 8-1 will be apportioned over the relevant Interest Period. | Section 109-5 - time of acquisition of Underlying Securities: 50. Section 109-5 applies to Investors to treat them as having acquired the Underlying Securities at the time the Investors obtained beneficial ownership of the Underlying Securities. This is the time that the Instalment Security Trustee acquires the Underlying Securities on the Investor's behalf, or, for Securityholder or Rollover Applicants, the time the Investor originally acquired beneficial ownership of the Underlying Securities. | Subsection 104-10(7) - disposal of Underlying Securities: 51. When the Investor completes the Next Financial Instalment, no CGT event will arise in respect of the transfer of the legal title to the Underlying Security from the Instalment Security Trustee to the Investor by virtue of subsection 104-10(7). | Section 110-25 - cost base of 'notional' put option: 52. The Interest Amount charged on the Loan that is reasonably attributable to the capital protection feature of the Loan (determined in accordance with paragraph 20(b) of this Ruling) forms part of the cost base and reduced cost base of a 'notional' put option (under subsections 110-25(2) and (4)) which constitutes an asset for capital gains tax purposes and is separate and in addition to the other rights created under the Next Financial Instalment. | Section 104-25 - expiry of 'notional' put option: 53. Where the Investor completes the Next Financial Instalment or the Instalment is otherwise closed out in respect of the Underlying Securities and the capital protection feature of the Loan is not invoked, the 'notional' put option will expire. The expiration of the 'notional' put option gives rise to CGT event C2 (paragraph 104-25(1)(c)). The capital proceeds received on the lapsing of the 'notional' put option will be nil and the Investor will make a capital loss equal to the reduced cost base in the 'notional' put option which, pursuant to section 110-55, will include the amount determined to be attributable to the capital protection feature under paragraph 20(b) of this Ruling. | Section 104-10 - CGT event A1: 54. Where the Investor chooses to sell their Underlying Securities to the Lender for the Loan Amount allocated to them or they are sold by the Lender on exercise of its power of sale under the Security Interest and not pursuing the Investor for the shortfall in repayment of the Loan Amount, CGT event A1 will arise for the Investor. In these circumstances the capital protection feature is invoked and the 'notional' put option will be taken to have been exercised. As a result of the capital protection feature being invoked, the cost base of the 'notional' put option, as worked out according to paragraph 20(b) of this Ruling, will be included in the cost base or reduced cost base of the Underlying Securities disposed of pursuant to section 134-1. | Section 115-5 - discount capital gains: 55. 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 will be treated as a discount capital gain where the Investor is an individual, a complying superannuation entity, or a trust and has held a beneficial interest in the Underlying Security for at least 12 months (excluding the days of acquisition and disposal). | Section 97: 56. The Investors are presently entitled to all of the income derived from the Underlying Securities. Therefore, section 97 of the ITAA 1936 will apply to assess the Investors on the income derived from the Underlying Securities. | Section 25-25 - deductibility of Establishment Fee: 57. No part of the Establishment Fee is attributable to interest or capital protection. The Establishment Fee is deductible in accordance with section 25-25 from the Drawdown Date of the Loan. | Schedule 2C - commercial debt forgiveness: 58. Where the limited recourse feature of the Loan comes into effect, the Investor is not required to pay the Final Instalment Payment, and therefore there will be a commercial debt forgiveness under section 245-35 of Schedule 2C to the ITAA 1936. Under Schedule 2C where a forgiveness results in an 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. 59. To determine the net forgiven amount of a 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. 60. The notional value of the Final Instalment Payment debt 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 Securities 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 Instalments may come into effect is where the market value of the Underlying Securities will not cover the Final Instalment Payment. In such a situation the market value of the Lender's rights in relation to the Underlying Securities will arguably be no more than the market value of the Underlying Securities at that point in time. 61. 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. Arguably, this market value is equal to the market value of the Lender's rights in relation to the Underlying Securities. Therefore the gross forgiven amount will be nil. 62. 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. | Part IVA - anti-avoidance: 63. Provided that the scheme ruled on is entered into and carried out as disclosed in this Ruling, it is accepted that the scheme is an ordinary commercial transaction and Part IVA of the ITAA 1936 will not apply. 64. 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 or the entities 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 (below) 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. Next Financial Instalments - Series NF 330 (Next Financial Instalments or Instalments) are an investment comprising the borrowing of moneys on limited recourse terms from a wholly-owned subsidiary of Next Financial Limited (Next Financial): 3. In this Product Ruling the scheme is an investment in Next Financial Instalments where the shares, units and/or stapled securities forming part of the Underlying Securities are listed for quotation on the Australian Securities Exchange (ASX). 4. The Ruling does not address: | Class of entities: 5. This part of the Product Ruling specifies which entities can rely on the tax benefits set out in the Ruling section of this Product Ruling and which entities cannot rely on those tax benefits. In this Product Ruling, those entities that can rely on the tax benefits set out in this Ruling are referred to as Investors. 6. The class of entities who can rely on those tax benefits consists of entities that are accepted to participate in the scheme specified below on or after the date this Product Ruling is made and on or before 30 June 2012. They must have a purpose of staying in the scheme until it is completed (that is, being a party to the relevant agreements mentioned in paragraph 21 of this Ruling until their term expires), and deriving assessable income from this involvement. 7. 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: 8. 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: 9. 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 21 to 26 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 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 - deductibility of interest and administration fees: 27. The interest paid on a borrowing used to acquire income producing assets such as shares or units in a trust is generally treated as deductible under section 8-1 where it is expected that dividends or other assessable income would be derived from the investment (Taxation Ruling TR 95/33). 28. Administration fees in relation to the management of income producing assets is generally treated as deductible under section 8-1 where it is expected that assessable income would be derived from the investment. | Division 247 - capital protected borrowings: 29. Division 247 applies to the arrangement as a capital protected borrowing (CPB) because the Investor uses the Loan to acquire a beneficial interest in shares, units or stapled securities, or uses such assets as security for the Loan, and the Investor is protected against the fall in the market value of the shares, units or stapled securities for the purposes of section 247-10. 30. Division 247 sets out a methodology for reasonably attributing the cost of capital protection incurred by a borrower under a CPB (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 (subsection 247-20(3)). 31. Under the Next Financial Instalments, the amount reasonably attributable to the cost of capital protection is worked out under the method statement in subsection 247-20(3), as set out in paragraph 20(b) of this Ruling. This amount will be treated as an amount incurred by the Investor for a put option (the 'notional' put option) granted by the Lender, under the arrangement (subsection 247-20(6)). 32. The Investor's 'notional' put option is a capital asset. As the cost of capital protection is the cost of the 'notional' put option, this expense will be capital in nature. The Interest Amount will be deductible under section 8-1 only to the extent that it is not the cost of capital protection. | Section 51AAA: 33. An Investor is expected to derive assessable income over the period of their investment in the Next Financial Instalment by way of the receipt of dividend income and/or other distributions of income, and capital gains obtained on any sale of the Underlying Securities. As the Interest Amount will be 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 acquiring Next Financial Instalments. | Section 82KL: 34. 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: 35. Subdivision H of Division 3 of Part III of the ITAA 1936 (Subdivision H) deals with the timing of deductions for certain advance expenditure incurred under an agreement in return for the doing of a thing under that agreement that will not be wholly done within the same year of income. Separate rules apply depending on whether the expenditure is incurred in carrying on a business, whether the Investor is a small business entity, whether the Investor is an individual and whether the Investor is not an individual and incurs the expenditure otherwise than in carrying on a business. This Subdivision does not apply to 'excluded expenditure' which is defined in subsection 82KZL(1) of the ITAA 1936 to include amounts of less than $1,000, or amounts of expenditure that are of a capital nature. | Subdivision 328-C - small business entity: 36. An Investor will be a small business entity for an income year if the Investor carries on a business in that year and either the aggregated turnover for the year is, or is likely to be, less than $2 million, or the aggregated turnover from a business carried on in the previous income year was less than $2 million. | The eligible service period for the purposes of Subdivision H: 37. The Interest Amount that is an allowable deduction under section 8-1 of the ITAA 1997 is in relation to a prepayment of interest on the Loan. Paragraph 82KZL(2)(a) of the ITAA 1936 provides that a payment of interest that is made in return for the making available of a loan principal is to be taken, for the purposes of Subdivision H of the ITAA 1936, to be expenditure incurred under an agreement in return for the doing of a thing under the agreement for the period to which the interest payment relates. The eligible service period in relation to a payment of interest is determined by reference to the period to which the interest relates, and not to the term of the loan (which may be up to 10 years in the case of the Loan). | Sections 82KZME and 82KZMF - prepaid expenditure and 'tax shelter' arrangements: 38. 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. 39. For the purposes of section 82KZME of the ITAA 1936, 'agreements' are broadly defined to include an entire arrangement of which a contract may form part. Under subsection 82KZME(4) of the ITAA 1936, the relevant 'agreement' is all the contractual arrangements and activities associated with the participation in the Next Financial Instalments, including the financing, purchase, holding and disposal arrangements for the Underlying Securities. 40. Under the arrangement, when an Investor acquires a Next Financial Instalment, they acquire beneficial ownership of the shares, units or stapled securities comprising the Underlying Securities. 41. Exception 1, as contained in subsection 82KZME(5) of the ITAA 1936, applies to exclude the portion of the Interest Amount deductible under section 8-1 of the ITAA 1997 incurred on borrowings under the Next Financial Instalment from the operation of section 82KZMF of the ITAA 1936, as: | Application of sections 82KZME and 82KZMF to prepayment of Administration Fee: 42. The Administration Fee incurred by an Investor meets the requirements of subsections 82KZME(1) and (2) of the ITAA 1936, is incurred under an 'agreement' as described in subsection 82KZME(3) of the ITAA 1936, and does not fall within any of the five exceptions to section 82KZME. Therefore, unless the expenditure is excluded expenditure, the deduction for each year is determined using the formula in subsection 82KZMF(1) of the ITAA 1936. Section 82KZMF of the ITAA 1936 will apportion the deduction for Administration Fees over the eligible service period (that is, the relevant Interest Period). | Section 82KZM - prepaid expenditure incurred by small business entities and individuals incurring non-business expenditure: 43. 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: 44. 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. | Prepayment of interest made at the commencement of annual Interest Periods: 45. That part of the portion of the Interest Amount deductible under section 8-1 of the ITAA 1997 and prepaid from an Investor's own funds at the commencement of an annual Interest Period relates to an eligible service period that is not more than 12 months and which ends on or before the last day of the year of income after the one in which the expenditure was incurred. Therefore, section 82KZM of the ITAA 1936 will have no application to Investors who are small business entities for the year of income that have not chosen for section 82KZMD of the ITAA 1936 to apply, or to Investors who are individual taxpayers and the expenditure is not incurred in carrying on a business. Investors who satisfy these conditions will be able to claim an immediate deduction in respect of that portion of the Interest Amount. | Prepayment of interest made on the Drawdown Date: 46. That part of the portion of the Interest Amount deductible under section 8-1 of the ITAA 1997 and prepaid on the Drawdown Date from a portion of the Loan Amount relates to subsequent annual Interest Periods and, when incurred by an Investor that is either a small business entity for the year of income that has not chosen for section 82KZMD of the ITAA 1936 to apply or an individual taxpayer not carrying on a business, will be apportioned over the eligible service period in accordance with section 82KZM of the ITAA 1936 as the eligible service period for this expenditure is longer than 12 months. | Sections 82KZMA and 82KZMD - prepaid non-business expenditure incurred by taxpayers that are not individuals or small business entities: 47. 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 that has not chosen for section 82KZMD to apply) who is a taxpayer that is not an individual and does not carry on a business. 48. 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. 49. For these Investors, the allowable deduction for the portion of the prepaid Interest Amount deductible under section 8-1 will be apportioned over the relevant Interest Period. | Section 109-5 - time of acquisition of Underlying Securities: 50. Section 109-5 applies to Investors to treat them as having acquired the Underlying Securities at the time the Investors obtained beneficial ownership of the Underlying Securities. This is the time that the Instalment Security Trustee acquires the Underlying Securities on the Investor's behalf, or, for Securityholder or Rollover Applicants, the time the Investor originally acquired beneficial ownership of the Underlying Securities. | Subsection 104-10(7) - disposal of Underlying Securities: 51. When the Investor completes the Next Financial Instalment, no CGT event will arise in respect of the transfer of the legal title to the Underlying Security from the Instalment Security Trustee to the Investor by virtue of subsection 104-10(7). | Section 110-25 - cost base of 'notional' put option: 52. The Interest Amount charged on the Loan that is reasonably attributable to the capital protection feature of the Loan (determined in accordance with paragraph 20(b) of this Ruling) forms part of the cost base and reduced cost base of a 'notional' put option (under subsections 110-25(2) and (4)) which constitutes an asset for capital gains tax purposes and is separate and in addition to the other rights created under the Next Financial Instalment. | Section 104-25 - expiry of 'notional' put option: 53. Where the Investor completes the Next Financial Instalment or the Instalment is otherwise closed out in respect of the Underlying Securities and the capital protection feature of the Loan is not invoked, the 'notional' put option will expire. The expiration of the 'notional' put option gives rise to CGT event C2 (paragraph 104-25(1)(c)). The capital proceeds received on the lapsing of the 'notional' put option will be nil and the Investor will make a capital loss equal to the reduced cost base in the 'notional' put option which, pursuant to section 110-55, will include the amount determined to be attributable to the capital protection feature under paragraph 20(b) of this Ruling. | Section 104-10 - CGT event A1: 54. Where the Investor chooses to sell their Underlying Securities to the Lender for the Loan Amount allocated to them or they are sold by the Lender on exercise of its power of sale under the Security Interest and not pursuing the Investor for the shortfall in repayment of the Loan Amount, CGT event A1 will arise for the Investor. In these circumstances the capital protection feature is invoked and the 'notional' put option will be taken to have been exercised. As a result of the capital protection feature being invoked, the cost base of the 'notional' put option, as worked out according to paragraph 20(b) of this Ruling, will be included in the cost base or reduced cost base of the Underlying Securities disposed of pursuant to section 134-1. | Section 115-5 - discount capital gains: 55. 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 will be treated as a discount capital gain where the Investor is an individual, a complying superannuation entity, or a trust and has held a beneficial interest in the Underlying Security for at least 12 months (excluding the days of acquisition and disposal). | Section 97: 56. The Investors are presently entitled to all of the income derived from the Underlying Securities. Therefore, section 97 of the ITAA 1936 will apply to assess the Investors on the income derived from the Underlying Securities. | Section 25-25 - deductibility of Establishment Fee: 57. No part of the Establishment Fee is attributable to interest or capital protection. The Establishment Fee is deductible in accordance with section 25-25 from the Drawdown Date of the Loan. | Schedule 2C - commercial debt forgiveness: 58. Where the limited recourse feature of the Loan comes into effect, the Investor is not required to pay the Final Instalment Payment, and therefore there will be a commercial debt forgiveness under section 245-35 of Schedule 2C to the ITAA 1936. Under Schedule 2C where a forgiveness results in an 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. 59. To determine the net forgiven amount of a 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. 60. The notional value of the Final Instalment Payment debt 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 Securities 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 Instalments may come into effect is where the market value of the Underlying Securities will not cover the Final Instalment Payment. In such a situation the market value of the Lender's rights in relation to the Underlying Securities will arguably be no more than the market value of the Underlying Securities at that point in time. 61. 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. Arguably, this market value is equal to the market value of the Lender's rights in relation to the Underlying Securities. Therefore the gross forgiven amount will be nil. 62. 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. | Part IVA - anti-avoidance: 63. Provided that the scheme ruled on is entered into and carried out as disclosed 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, 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. | 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 82KZM(1) ITAA 1936 82KZMA ITAA 1936 82KZMD ITAA 1936 82KZMD(2) ITAA 1936 82KZME ITAA 1936 82KZME(1) ITAA 1936 82KZME(2) ITAA 1936 82KZME(3) ITAA 1936 82KZME(4) ITAA 1936 82KZME(5) ITAA 1936 82KZME(5)(b)(iii) ITAA 1936 82KZMF ITAA 1936 82KZMF(1) ITAA 1936 Pt III Div 3 Subdiv H ITAA 1936 97 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 ITAA 1997 8-1 ITAA 1997 25-25 ITAA 1997 104-10 ITAA 1997 104-10(7) ITAA 1997 104-25 ITAA 1997 104-25(1)(c) ITAA 1997 109-5 ITAA 1997 110-25 ITAA 1997 110-25(2) ITAA 1997 110-25(4) ITAA 1997 110-55 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 247-10 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 TAA 1953 TAA 1953 Sch 1 357-75(1) Copyright Act 1968 Corporations Act 2001 SISA 1993
Subject references: capital protected borrowing financial products instalments interest expenses prepaid expenses product rulings public rulings small business taxpayer taxation administration tax avoidance