Product Ruling PR 2023/10
Date of effect: 1 July 2023

What this ruling is about: 1. This Ruling sets out the income tax consequences for borrowers in relation to a scheme involving the application of software licenced to Findexia Limited (Findexia) which, in part, calculates a variable interest rate that is charged by a lender on the home loan of a borrower by reference to movements in the measure of an Index or Indexes. 2. All legislative references in this Ruling are to the Income Tax Assessment Act 1997, unless otherwise indicated. Terms which are defined in the pro forma terms referred to in paragraph 10 of this Ruling have been capitalised. 3. This Ruling does not address: Who this Ruling applies to 4. This Ruling applies to you if you are an individual who, as the borrower, enter into the scheme described in paragraphs 10 to 24 of this Ruling on or after 1 July 2023 and on or before 30 June 2026. 5. This Ruling does not apply to you if you are an individual who enters into this scheme before 1 July 2023 or after 30 June 2026. 6. This Ruling applies from 1 July 2023 to the borrowers specified in paragraph 4 of this Ruling who enter into the scheme from 1 July 2023 until 30 June 2026. 7. However, the Ruling only applies and may be relied on to the extent that there is no change in the scheme or in the entity's involvement in the scheme. If the scheme carried out is materially different from the scheme described at paragraphs 10 to 24 of this Ruling, this Ruling cannot be relied upon and may be withdrawn or modified. 8. Subject to paragraph 3 of this Ruling and the assumptions in paragraph 9 of this Ruling: Assumptions 9. This Ruling is made on the basis of the following necessary assumptions: 10. The scheme that is the subject of this Ruling is identified and described in the following: Note: Certain information has been provided on a commercial-in-confidence basis and will not be disclosed or released under Freedom of Information legislation. 11. For the purposes of describing the scheme, and aside from the relevant loan and security documentation to be executed between the borrower and the lender, there are no other agreements (whether formal or informal and whether or not legally enforceable) which the borrower, or any associate of the borrower, will be a party to which are a part of the scheme. 12. All Australian Securities and Investments Commission requirements are, or will be, complied with for the term of the agreements. Overview of scheme 13. As the exclusive Australian licensee of software that enables the computation of a loan interest rate in the manner described in paragraph 15 of this Ruling, Findexia will administer any variable rate home loan that is: 14. The lender will be an existing mortgage lender or a special purpose trust established to fund loans referred to in paragraph 13 of this Ruling by way of a residential mortgage-backed securities issue. 15. Pursuant to the pro forma terms and during a Non Index Period over which the rate of interest under the loan will be that defined by, or computed in accordance with, the Standard Terms (the Base Rate), the borrower (an individual) may, but need not, elect via a Link On Request to have the interest under the loan calculated at an Indexed Rate, being a rate computed in part by reference to movements in the measure of an Index or Indexes. 16. Indexed Rates are defined in the pro forma terms to mean, in respect of an Index Period, a series of rates derived by adjusting the Base Rates by applying a constant discount or premium solved for by Findexia using the Calculation Method. The Calculation Method engaged by Findexia to calculate Indexed Rates incorporates, among other things and in addition to changes in the measure of the relevant Index, Base Rates, Benchmark Rates and Participation Factors. 17. A Link On Request provided by the borrower to the lender must specify the Index or Indexes by reference to which the borrower wishes the Indexed Rate to be calculated (being any Index or Indexes identified by the lender as available for selection by the borrower for this purpose), and any factors by which movements in the Index or Indexes will be scaled. 18. The right and obligation of the lender to have changes in the measure of an Index taken into account in the calculation of interest charges under the loan is referred to by Findexia as Linking. 19. In the course of an Index Period the borrower may vary a Link as between Indexes via a Link Variation Request, or terminate all prevailing links to an Index (and engage Base Rates when calculating interest under the loan) via a Links Off Instruction. 20. Acceptance (or the extent of acceptance) of a Link On Request or a Link Variation Request is at the discretion of the lender. 21. Linking involves the calculation of the loan interest rate, the Indexed Rate, according to a series of equations which impute 'sufficiently positive' results to the borrower by way of a reduction in the loan interest rate (that is, a rate of interest below the Base Rate), enabling the loan to be amortised faster than would otherwise be the case. In this context 'sufficiently positive' means the performance of the Index exceeds a Benchmark Rate (for example, the standard mortgage rate) nominated by the lender. 22. Conversely, if the Index performance isn't 'sufficiently positive' by virtue of it being below the Benchmark Rate nominated by the lender, the Indexed Rate charged to the borrower under the loan will be higher than it would otherwise have been at the Base Rate. 23. Pursuant to the pro forma terms the borrower acknowledges that: 24. The borrower's loan will not be part of: Commissioner of Taxation 12 July 2023 Interest not deductible under section 8-1 25. Expenditure, including interest on money borrowed, is deductible under section 8-1 if its essential character is that of expenditure that has a sufficient connection with the operations or activities which more directly gain or produce a taxpayer's assessable income, provided that the expenditure is not of a capital, private or domestic nature. 26. The essential character of interest on money borrowed is a question of fact to be determined by reference to the objective circumstances of the use to which the borrowed funds are put by the borrower (Federal Commissioner of Taxation v Munro [1926] HCA 58). 27. Interest paid on a borrowing used to acquire an asset or fund expenditure is generally not treated as deductible under section 8-1 where it is not expected that assessable income would be derived from the asset or the expenditure, or where the funded expenditure is of a private nature. Base Rate 28. Interest incurred by a borrower at the Base Rate under a home loan does not have sufficient connection with the gaining of assessable income to be deductible under section 8-1 where the loan is used to fund: 29. Interest incurred by a borrower at the Base Rate under a home loan used to fund some other form of private expenditure will not have sufficient connection with the gaining of assessable income to be deductible under section 8-1 or, otherwise, cannot be deducted under section 8-1 pursuant to paragraph 8-1(2)(b). Indexed Rate 30. Linking merely confers a right to have the rate of interest under the loan computed in part by reference to relative movements in the measure of an Index (that is, at the Indexed Rate). Any increase or decrease in the interest rate attributable to a change in the measure of that Index in turn results in a relative increase or decrease in interest charged under the loan, but the character of the expenditure incurred by the borrower nevertheless does not change. 31. Therefore, for the reason set out in paragraph 27 of this Ruling, any increase in the amount of interest incurred by the borrower at the Indexed Rate as compared to that which would have been incurred by them at the Base Rate is also not deductible under section 8-1. Refinancing an original loan 32. The interest expense on a new loan will be deductible if the new loan is used to repay an existing loan which, at the time of the second borrowing, was being used in an assessable income-producing activity (see paragraph 42 of Taxation Ruling TR 95/25 Income tax: deductions for interest under section 8-1 of the Income Tax Assessment Act 1997 following FC of T v. Roberts; FC of T v. Smith, referring to Commissioner of Taxation v Roberts, J.D. Commissioner of Taxation v Smith, V.R. [1992] FCA 543). 33. Alternatively, the interest expense on a new loan will not be deductible if the new loan is used to repay an existing loan which, at the time of the second borrowing, was not being used in an assessable income-producing activity. It follows that interest incurred on any refinanced home loan of the borrower used to repay an existing home loan procured to fund the acquisition of their principal place of residence (irrespective of whether that interest accrues at the Base or Indexed Rate) will also not be deductible under section 8-1. Reduction of interest not assessable as ordinary income under section 6-5 34. Section 6-5 includes income according to ordinary concepts (ordinary income) in assessable income. Whether or not a particular amount is income according to ordinary concepts depends on the nature and character of the receipt in the hands of the taxpayer. 35. Ordinary income may be said to be derived pursuant to subsection 6-5(4) which provides that an amount of ordinary income will be taken to be received as soon as it has been applied or dealt with in any way on behalf of or as directed by the taxpayer. 36. Any reduction in the amount of interest incurred by the borrower at the Indexed Rate as compared to that which would have been incurred by them at the Base Rate is not an amount paid or credited to the borrower, nor an amount which is applied or dealt with on behalf of the borrower or as the borrower directs. 37. As an amount represented by the reduction in interest that will otherwise be payable by the borrower on the loan at the Base Rate will not be received by, or credited to the borrower (either directly or as deemed by subsection 6-5(4)), that amount will not be subject to tax pursuant to section 6-5. Application of Part IVA of the ITAA 1936 38. Part IVA of the ITAA 1936 is a general anti-avoidance rule which gives the Commissioner the ability to cancel all or part of a tax benefit that has been obtained or would, but for section 177F of the ITAA 1936, be obtained by a taxpayer in connection with a scheme to which Part IVA applies. 39. In broad terms, Part IVA of the ITAA 1936 will apply where the following requirements are satisfied: Identification of the scheme 40. The term 'scheme' is defined very broadly in section 177A of the ITAA 1936 to mean: 41. The precise description of a scheme for the purposes of Part IVA of the ITAA 1936 will depend on the facts of the particular case. The circumstances described in paragraphs 10 to 24 of this Ruling constitute a scheme for the purposes of the definition set out in section 177A of the ITAA 1936. The tax benefit test 42. A tax benefit can arise to the borrower in relation to a year of income where their assessable income of a year of income, as a result of not having included an amount equivalent to a reduction in interest which accrues under the loan at the Indexed Rate, is less than that which the borrower would have derived, or might reasonably be expected to have derived, but for entering into a scheme. 43. While the borrower will not include in their assessable income an amount equivalent to any reduction in interest accrued under their loan at the Indexed Rate, they would not be expected to include an amount in their assessable income but for entering into the scheme described in paragraphs 10 to 24 of this Ruling - that is, in the event they had only incurred interest under the loan at a higher Base Rate. A tax benefit should therefore not arise to the borrower in relation to a year of income in connection with this scheme. © 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).

Class of entities or scheme: 13. As the exclusive Australian licensee of software that enables the computation of a loan interest rate in the manner described in paragraph 15 of this Ruling, Findexia will administer any variable rate home loan that is: 14. The lender will be an existing mortgage lender or a special purpose trust established to fund loans referred to in paragraph 13 of this Ruling by way of a residential mortgage-backed securities issue. 15. Pursuant to the pro forma terms and during a Non Index Period over which the rate of interest under the loan will be that defined by, or computed in accordance with, the Standard Terms (the Base Rate), the borrower (an individual) may, but need not, elect via a Link On Request to have the interest under the loan calculated at an Indexed Rate, being a rate computed in part by reference to movements in the measure of an Index or Indexes. 16. Indexed Rates are defined in the pro forma terms to mean, in respect of an Index Period, a series of rates derived by adjusting the Base Rates by applying a constant discount or premium solved for by Findexia using the Calculation Method. The Calculation Method engaged by Findexia to calculate Indexed Rates incorporates, among other things and in addition to changes in the measure of the relevant Index, Base Rates, Benchmark Rates and Participation Factors. 17. A Link On Request provided by the borrower to the lender must specify the Index or Indexes by reference to which the borrower wishes the Indexed Rate to be calculated (being any Index or Indexes identified by the lender as available for selection by the borrower for this purpose), and any factors by which movements in the Index or Indexes will be scaled. 18. The right and obligation of the lender to have changes in the measure of an Index taken into account in the calculation of interest charges under the loan is referred to by Findexia as Linking. 19. In the course of an Index Period the borrower may vary a Link as between Indexes via a Link Variation Request, or terminate all prevailing links to an Index (and engage Base Rates when calculating interest under the loan) via a Links Off Instruction. 20. Acceptance (or the extent of acceptance) of a Link On Request or a Link Variation Request is at the discretion of the lender. 21. Linking involves the calculation of the loan interest rate, the Indexed Rate, according to a series of equations which impute 'sufficiently positive' results to the borrower by way of a reduction in the loan interest rate (that is, a rate of interest below the Base Rate), enabling the loan to be amortised faster than would otherwise be the case. In this context 'sufficiently positive' means the performance of the Index exceeds a Benchmark Rate (for example, the standard mortgage rate) nominated by the lender. 22. Conversely, if the Index performance isn't 'sufficiently positive' by virtue of it being below the Benchmark Rate nominated by the lender, the Indexed Rate charged to the borrower under the loan will be higher than it would otherwise have been at the Base Rate. 23. Pursuant to the pro forma terms the borrower acknowledges that: 24. The borrower's loan will not be part of: Commissioner of Taxation 12 July 2023 | Interest not deductible under section 8-1: 25. Expenditure, including interest on money borrowed, is deductible under section 8-1 if its essential character is that of expenditure that has a sufficient connection with the operations or activities which more directly gain or produce a taxpayer's assessable income, provided that the expenditure is not of a capital, private or domestic nature. 26. The essential character of interest on money borrowed is a question of fact to be determined by reference to the objective circumstances of the use to which the borrowed funds are put by the borrower (Federal Commissioner of Taxation v Munro [1926] HCA 58). 27. Interest paid on a borrowing used to acquire an asset or fund expenditure is generally not treated as deductible under section 8-1 where it is not expected that assessable income would be derived from the asset or the expenditure, or where the funded expenditure is of a private nature. | Base Rate: 28. Interest incurred by a borrower at the Base Rate under a home loan does not have sufficient connection with the gaining of assessable income to be deductible under section 8-1 where the loan is used to fund: 29. Interest incurred by a borrower at the Base Rate under a home loan used to fund some other form of private expenditure will not have sufficient connection with the gaining of assessable income to be deductible under section 8-1 or, otherwise, cannot be deducted under section 8-1 pursuant to paragraph 8-1(2)(b). | Indexed Rate: 30. Linking merely confers a right to have the rate of interest under the loan computed in part by reference to relative movements in the measure of an Index (that is, at the Indexed Rate). Any increase or decrease in the interest rate attributable to a change in the measure of that Index in turn results in a relative increase or decrease in interest charged under the loan, but the character of the expenditure incurred by the borrower nevertheless does not change. 31. Therefore, for the reason set out in paragraph 27 of this Ruling, any increase in the amount of interest incurred by the borrower at the Indexed Rate as compared to that which would have been incurred by them at the Base Rate is also not deductible under section 8-1. | Refinancing an original loan: 32. The interest expense on a new loan will be deductible if the new loan is used to repay an existing loan which, at the time of the second borrowing, was being used in an assessable income-producing activity (see paragraph 42 of Taxation Ruling TR 95/25 Income tax: deductions for interest under section 8-1 of the Income Tax Assessment Act 1997 following FC of T v. Roberts; FC of T v. Smith, referring to Commissioner of Taxation v Roberts, J.D. Commissioner of Taxation v Smith, V.R. [1992] FCA 543). 33. Alternatively, the interest expense on a new loan will not be deductible if the new loan is used to repay an existing loan which, at the time of the second borrowing, was not being used in an assessable income-producing activity. It follows that interest incurred on any refinanced home loan of the borrower used to repay an existing home loan procured to fund the acquisition of their principal place of residence (irrespective of whether that interest accrues at the Base or Indexed Rate) will also not be deductible under section 8-1. | Reduction of interest not assessable as ordinary income under section 6-5: 34. Section 6-5 includes income according to ordinary concepts (ordinary income) in assessable income. Whether or not a particular amount is income according to ordinary concepts depends on the nature and character of the receipt in the hands of the taxpayer. 35. Ordinary income may be said to be derived pursuant to subsection 6-5(4) which provides that an amount of ordinary income will be taken to be received as soon as it has been applied or dealt with in any way on behalf of or as directed by the taxpayer. 36. Any reduction in the amount of interest incurred by the borrower at the Indexed Rate as compared to that which would have been incurred by them at the Base Rate is not an amount paid or credited to the borrower, nor an amount which is applied or dealt with on behalf of the borrower or as the borrower directs. 37. As an amount represented by the reduction in interest that will otherwise be payable by the borrower on the loan at the Base Rate will not be received by, or credited to the borrower (either directly or as deemed by subsection 6-5(4)), that amount will not be subject to tax pursuant to section 6-5. | Application of Part IVA of the ITAA 1936: 38. Part IVA of the ITAA 1936 is a general anti-avoidance rule which gives the Commissioner the ability to cancel all or part of a tax benefit that has been obtained or would, but for section 177F of the ITAA 1936, be obtained by a taxpayer in connection with a scheme to which Part IVA applies. 39. In broad terms, Part IVA of the ITAA 1936 will apply where the following requirements are satisfied: | Identification of the scheme: 40. The term 'scheme' is defined very broadly in section 177A of the ITAA 1936 to mean: 41. The precise description of a scheme for the purposes of Part IVA of the ITAA 1936 will depend on the facts of the particular case. The circumstances described in paragraphs 10 to 24 of this Ruling constitute a scheme for the purposes of the definition set out in section 177A of the ITAA 1936. | The tax benefit test: 42. A tax benefit can arise to the borrower in relation to a year of income where their assessable income of a year of income, as a result of not having included an amount equivalent to a reduction in interest which accrues under the loan at the Indexed Rate, is less than that which the borrower would have derived, or might reasonably be expected to have derived, but for entering into a scheme. 43. While the borrower will not include in their assessable income an amount equivalent to any reduction in interest accrued under their loan at the Indexed Rate, they would not be expected to include an amount in their assessable income but for entering into the scheme described in paragraphs 10 to 24 of this Ruling - that is, in the event they had only incurred interest under the loan at a higher Base Rate. A tax benefit should therefore not arise to the borrower in relation to a year of income in connection with this scheme. © 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).

Ruling: 1. This Ruling sets out the income tax consequences for borrowers in relation to a scheme involving the application of software licenced to Findexia Limited (Findexia) which, in part, calculates a variable interest rate that is charged by a lender on the home loan of a borrower by reference to movements in the measure of an Index or Indexes. 2. All legislative references in this Ruling are to the Income Tax Assessment Act 1997, unless otherwise indicated. Terms which are defined in the pro forma terms referred to in paragraph 10 of this Ruling have been capitalised. 3. This Ruling does not address: | Who this Ruling applies to: 4. This Ruling applies to you if you are an individual who, as the borrower, enter into the scheme described in paragraphs 10 to 24 of this Ruling on or after 1 July 2023 and on or before 30 June 2026. 5. This Ruling does not apply to you if you are an individual who enters into this scheme before 1 July 2023 or after 30 June 2026. 6. This Ruling applies from 1 July 2023 to the borrowers specified in paragraph 4 of this Ruling who enter into the scheme from 1 July 2023 until 30 June 2026. 7. However, the Ruling only applies and may be relied on to the extent that there is no change in the scheme or in the entity's involvement in the scheme. If the scheme carried out is materially different from the scheme described at paragraphs 10 to 24 of this Ruling, this Ruling cannot be relied upon and may be withdrawn or modified. 8. Subject to paragraph 3 of this Ruling and the assumptions in paragraph 9 of this Ruling: | Assumptions: 9. This Ruling is made on the basis of the following necessary assumptions: 10. The scheme that is the subject of this Ruling is identified and described in the following: Note: Certain information has been provided on a commercial-in-confidence basis and will not be disclosed or released under Freedom of Information legislation. 11. For the purposes of describing the scheme, and aside from the relevant loan and security documentation to be executed between the borrower and the lender, there are no other agreements (whether formal or informal and whether or not legally enforceable) which the borrower, or any associate of the borrower, will be a party to which are a part of the scheme. 12. All Australian Securities and Investments Commission requirements are, or will be, complied with for the term of the agreements. | Overview of scheme: 13. As the exclusive Australian licensee of software that enables the computation of a loan interest rate in the manner described in paragraph 15 of this Ruling, Findexia will administer any variable rate home loan that is: 14. The lender will be an existing mortgage lender or a special purpose trust established to fund loans referred to in paragraph 13 of this Ruling by way of a residential mortgage-backed securities issue. 15. Pursuant to the pro forma terms and during a Non Index Period over which the rate of interest under the loan will be that defined by, or computed in accordance with, the Standard Terms (the Base Rate), the borrower (an individual) may, but need not, elect via a Link On Request to have the interest under the loan calculated at an Indexed Rate, being a rate computed in part by reference to movements in the measure of an Index or Indexes. 16. Indexed Rates are defined in the pro forma terms to mean, in respect of an Index Period, a series of rates derived by adjusting the Base Rates by applying a constant discount or premium solved for by Findexia using the Calculation Method. The Calculation Method engaged by Findexia to calculate Indexed Rates incorporates, among other things and in addition to changes in the measure of the relevant Index, Base Rates, Benchmark Rates and Participation Factors. 17. A Link On Request provided by the borrower to the lender must specify the Index or Indexes by reference to which the borrower wishes the Indexed Rate to be calculated (being any Index or Indexes identified by the lender as available for selection by the borrower for this purpose), and any factors by which movements in the Index or Indexes will be scaled. 18. The right and obligation of the lender to have changes in the measure of an Index taken into account in the calculation of interest charges under the loan is referred to by Findexia as Linking. 19. In the course of an Index Period the borrower may vary a Link as between Indexes via a Link Variation Request, or terminate all prevailing links to an Index (and engage Base Rates when calculating interest under the loan) via a Links Off Instruction. 20. Acceptance (or the extent of acceptance) of a Link On Request or a Link Variation Request is at the discretion of the lender. 21. Linking involves the calculation of the loan interest rate, the Indexed Rate, according to a series of equations which impute 'sufficiently positive' results to the borrower by way of a reduction in the loan interest rate (that is, a rate of interest below the Base Rate), enabling the loan to be amortised faster than would otherwise be the case. In this context 'sufficiently positive' means the performance of the Index exceeds a Benchmark Rate (for example, the standard mortgage rate) nominated by the lender. 22. Conversely, if the Index performance isn't 'sufficiently positive' by virtue of it being below the Benchmark Rate nominated by the lender, the Indexed Rate charged to the borrower under the loan will be higher than it would otherwise have been at the Base Rate. 23. Pursuant to the pro forma terms the borrower acknowledges that: 24. The borrower's loan will not be part of: Commissioner of Taxation 12 July 2023 | Interest not deductible under section 8-1: 25. Expenditure, including interest on money borrowed, is deductible under section 8-1 if its essential character is that of expenditure that has a sufficient connection with the operations or activities which more directly gain or produce a taxpayer's assessable income, provided that the expenditure is not of a capital, private or domestic nature. 26. The essential character of interest on money borrowed is a question of fact to be determined by reference to the objective circumstances of the use to which the borrowed funds are put by the borrower (Federal Commissioner of Taxation v Munro [1926] HCA 58). 27. Interest paid on a borrowing used to acquire an asset or fund expenditure is generally not treated as deductible under section 8-1 where it is not expected that assessable income would be derived from the asset or the expenditure, or where the funded expenditure is of a private nature. | Base Rate: 28. Interest incurred by a borrower at the Base Rate under a home loan does not have sufficient connection with the gaining of assessable income to be deductible under section 8-1 where the loan is used to fund: 29. Interest incurred by a borrower at the Base Rate under a home loan used to fund some other form of private expenditure will not have sufficient connection with the gaining of assessable income to be deductible under section 8-1 or, otherwise, cannot be deducted under section 8-1 pursuant to paragraph 8-1(2)(b). | Indexed Rate: 30. Linking merely confers a right to have the rate of interest under the loan computed in part by reference to relative movements in the measure of an Index (that is, at the Indexed Rate). Any increase or decrease in the interest rate attributable to a change in the measure of that Index in turn results in a relative increase or decrease in interest charged under the loan, but the character of the expenditure incurred by the borrower nevertheless does not change. 31. Therefore, for the reason set out in paragraph 27 of this Ruling, any increase in the amount of interest incurred by the borrower at the Indexed Rate as compared to that which would have been incurred by them at the Base Rate is also not deductible under section 8-1. | Refinancing an original loan: 32. The interest expense on a new loan will be deductible if the new loan is used to repay an existing loan which, at the time of the second borrowing, was being used in an assessable income-producing activity (see paragraph 42 of Taxation Ruling TR 95/25 Income tax: deductions for interest under section 8-1 of the Income Tax Assessment Act 1997 following FC of T v. Roberts; FC of T v. Smith, referring to Commissioner of Taxation v Roberts, J.D. Commissioner of Taxation v Smith, V.R. [1992] FCA 543). 33. Alternatively, the interest expense on a new loan will not be deductible if the new loan is used to repay an existing loan which, at the time of the second borrowing, was not being used in an assessable income-producing activity. It follows that interest incurred on any refinanced home loan of the borrower used to repay an existing home loan procured to fund the acquisition of their principal place of residence (irrespective of whether that interest accrues at the Base or Indexed Rate) will also not be deductible under section 8-1. | Reduction of interest not assessable as ordinary income under section 6-5: 34. Section 6-5 includes income according to ordinary concepts (ordinary income) in assessable income. Whether or not a particular amount is income according to ordinary concepts depends on the nature and character of the receipt in the hands of the taxpayer. 35. Ordinary income may be said to be derived pursuant to subsection 6-5(4) which provides that an amount of ordinary income will be taken to be received as soon as it has been applied or dealt with in any way on behalf of or as directed by the taxpayer. 36. Any reduction in the amount of interest incurred by the borrower at the Indexed Rate as compared to that which would have been incurred by them at the Base Rate is not an amount paid or credited to the borrower, nor an amount which is applied or dealt with on behalf of the borrower or as the borrower directs. 37. As an amount represented by the reduction in interest that will otherwise be payable by the borrower on the loan at the Base Rate will not be received by, or credited to the borrower (either directly or as deemed by subsection 6-5(4)), that amount will not be subject to tax pursuant to section 6-5. | Application of Part IVA of the ITAA 1936: 38. Part IVA of the ITAA 1936 is a general anti-avoidance rule which gives the Commissioner the ability to cancel all or part of a tax benefit that has been obtained or would, but for section 177F of the ITAA 1936, be obtained by a taxpayer in connection with a scheme to which Part IVA applies. 39. In broad terms, Part IVA of the ITAA 1936 will apply where the following requirements are satisfied: | Identification of the scheme: 40. The term 'scheme' is defined very broadly in section 177A of the ITAA 1936 to mean: 41. The precise description of a scheme for the purposes of Part IVA of the ITAA 1936 will depend on the facts of the particular case. The circumstances described in paragraphs 10 to 24 of this Ruling constitute a scheme for the purposes of the definition set out in section 177A of the ITAA 1936. | The tax benefit test: 42. A tax benefit can arise to the borrower in relation to a year of income where their assessable income of a year of income, as a result of not having included an amount equivalent to a reduction in interest which accrues under the loan at the Indexed Rate, is less than that which the borrower would have derived, or might reasonably be expected to have derived, but for entering into a scheme. 43. While the borrower will not include in their assessable income an amount equivalent to any reduction in interest accrued under their loan at the Indexed Rate, they would not be expected to include an amount in their assessable income but for entering into the scheme described in paragraphs 10 to 24 of this Ruling - that is, in the event they had only incurred interest under the loan at a higher Base Rate. A tax benefit should therefore not arise to the borrower in relation to a year of income in connection with this scheme. © 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).


Appendix: Interest not deductible under section 8-1: 25. Expenditure, including interest on money borrowed, is deductible under section 8-1 if its essential character is that of expenditure that has a sufficient connection with the operations or activities which more directly gain or produce a taxpayer's assessable income, provided that the expenditure is not of a capital, private or domestic nature. 26. The essential character of interest on money borrowed is a question of fact to be determined by reference to the objective circumstances of the use to which the borrowed funds are put by the borrower (Federal Commissioner of Taxation v Munro [1926] HCA 58). 27. Interest paid on a borrowing used to acquire an asset or fund expenditure is generally not treated as deductible under section 8-1 where it is not expected that assessable income would be derived from the asset or the expenditure, or where the funded expenditure is of a private nature. | Base Rate: 28. Interest incurred by a borrower at the Base Rate under a home loan does not have sufficient connection with the gaining of assessable income to be deductible under section 8-1 where the loan is used to fund: 29. Interest incurred by a borrower at the Base Rate under a home loan used to fund some other form of private expenditure will not have sufficient connection with the gaining of assessable income to be deductible under section 8-1 or, otherwise, cannot be deducted under section 8-1 pursuant to paragraph 8-1(2)(b). | Indexed Rate: 30. Linking merely confers a right to have the rate of interest under the loan computed in part by reference to relative movements in the measure of an Index (that is, at the Indexed Rate). Any increase or decrease in the interest rate attributable to a change in the measure of that Index in turn results in a relative increase or decrease in interest charged under the loan, but the character of the expenditure incurred by the borrower nevertheless does not change. 31. Therefore, for the reason set out in paragraph 27 of this Ruling, any increase in the amount of interest incurred by the borrower at the Indexed Rate as compared to that which would have been incurred by them at the Base Rate is also not deductible under section 8-1. | Refinancing an original loan: 32. The interest expense on a new loan will be deductible if the new loan is used to repay an existing loan which, at the time of the second borrowing, was being used in an assessable income-producing activity (see paragraph 42 of Taxation Ruling TR 95/25 Income tax: deductions for interest under section 8-1 of the Income Tax Assessment Act 1997 following FC of T v. Roberts; FC of T v. Smith, referring to Commissioner of Taxation v Roberts, J.D. Commissioner of Taxation v Smith, V.R. [1992] FCA 543). 33. Alternatively, the interest expense on a new loan will not be deductible if the new loan is used to repay an existing loan which, at the time of the second borrowing, was not being used in an assessable income-producing activity. It follows that interest incurred on any refinanced home loan of the borrower used to repay an existing home loan procured to fund the acquisition of their principal place of residence (irrespective of whether that interest accrues at the Base or Indexed Rate) will also not be deductible under section 8-1. | Reduction of interest not assessable as ordinary income under section 6-5: 34. Section 6-5 includes income according to ordinary concepts (ordinary income) in assessable income. Whether or not a particular amount is income according to ordinary concepts depends on the nature and character of the receipt in the hands of the taxpayer. 35. Ordinary income may be said to be derived pursuant to subsection 6-5(4) which provides that an amount of ordinary income will be taken to be received as soon as it has been applied or dealt with in any way on behalf of or as directed by the taxpayer. 36. Any reduction in the amount of interest incurred by the borrower at the Indexed Rate as compared to that which would have been incurred by them at the Base Rate is not an amount paid or credited to the borrower, nor an amount which is applied or dealt with on behalf of the borrower or as the borrower directs. 37. As an amount represented by the reduction in interest that will otherwise be payable by the borrower on the loan at the Base Rate will not be received by, or credited to the borrower (either directly or as deemed by subsection 6-5(4)), that amount will not be subject to tax pursuant to section 6-5. | Application of Part IVA of the ITAA 1936: 38. Part IVA of the ITAA 1936 is a general anti-avoidance rule which gives the Commissioner the ability to cancel all or part of a tax benefit that has been obtained or would, but for section 177F of the ITAA 1936, be obtained by a taxpayer in connection with a scheme to which Part IVA applies. 39. In broad terms, Part IVA of the ITAA 1936 will apply where the following requirements are satisfied: | Identification of the scheme: 40. The term 'scheme' is defined very broadly in section 177A of the ITAA 1936 to mean: 41. The precise description of a scheme for the purposes of Part IVA of the ITAA 1936 will depend on the facts of the particular case. The circumstances described in paragraphs 10 to 24 of this Ruling constitute a scheme for the purposes of the definition set out in section 177A of the ITAA 1936. | The tax benefit test: 42. A tax benefit can arise to the borrower in relation to a year of income where their assessable income of a year of income, as a result of not having included an amount equivalent to a reduction in interest which accrues under the loan at the Indexed Rate, is less than that which the borrower would have derived, or might reasonably be expected to have derived, but for entering into a scheme. 43. While the borrower will not include in their assessable income an amount equivalent to any reduction in interest accrued under their loan at the Indexed Rate, they would not be expected to include an amount in their assessable income but for entering into the scheme described in paragraphs 10 to 24 of this Ruling - that is, in the event they had only incurred interest under the loan at a higher Base Rate. A tax benefit should therefore not arise to the borrower in relation to a year of income in connection with this scheme. © 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).


What this Ruling is about | If this Ruling applies to you, and you correctly rely on it, we will apply the law to you in the way set out in this Ruling. That is, you will not pay any more tax or penalties or interest in respect of the matters covered by this Ruling. | This Ruling has been given on the basis that the entity who applied for the 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 Ruling. | 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. | ... an amount not being included in the assessable income of the taxpayer of a year of income where that amount would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out | (a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and | (b) any scheme, plan, proposal, action, course of action or course of conduct.


Related rulings: TR 95/25 TR 98/22 TD 2012/1
Legislative references: ITAA 1936 Pt IVA ITAA 1936 177A ITAA 1936 177C(1)(a) ITAA 1936 177D(2) ITAA 1936 177F ITAA 1936 177F(1)(a) ITAA 1997 6-5 ITAA 1997 6-5(4) ITAA 1997 8-1 ITAA 1997 8-1(2)(b) ITAA 1997 Div 230
Case references: Federal Commissioner of Taxation (Cth) v Munro [1926] HCA 58 38 CLR 153 32 ALR 339