Product Ruling PR 2019/5
Date of effect: 1 July 2019

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 that takes part in the scheme to which this Product Ruling relates. All legislative references in this Product 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 Westpac Protected Equity Loan (the PEL) offered by Westpac Banking Corporation (the Bank) and issued under the Westpac Protected Equity Loan Product Disclosure Statement dated 22 July 2013 (PDS), as supplemented by the Supplementary Product Disclosure Statement dated 30 May 2014, the Supplementary Product Disclosure Statement dated 1 December 2015, the Notice to investors dated 12 November 2016, the Notice to investors dated 30 October 2018 and the Notice to investors dated 1 July 2019. 3. This Product Ruling does not address: Class of entities 4. 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. 5. The class of entities that can rely on the Ruling section of this Product Ruling consists of those entities that are accepted to participate in the scheme specified in this Ruling on or after 1 July 2019 and on or before 30 June 2022. 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. 6. The class of entities that can rely on this Product Ruling does not include entities that: Superannuation Industry (Supervision) Act 1993 7. This Product Ruling does not address the provisions of the Superannuation Industry (Supervision) Act 1993 (SISA). The Commissioner gives no assurance that the scheme is an appropriate investment for a superannuation fund. The trustees of superannuation funds are advised that no consideration has been given in this Product Ruling as to whether investment in this scheme may contravene the provisions of SISA. Qualifications 8. The class of entities defined in this Product Ruling may rely on it provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 16 to 20 of this Product Ruling. 9. 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: 4. 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. 5. The class of entities that can rely on the Ruling section of this Product Ruling consists of those entities that are accepted to participate in the scheme specified in this Ruling on or after 1 July 2019 and on or before 30 June 2022. 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. 6. The class of entities that can rely on this Product Ruling does not include entities that: | Superannuation Industry (Supervision) Act 1993: 7. This Product Ruling does not address the provisions of the Superannuation Industry (Supervision) Act 1993 (SISA). The Commissioner gives no assurance that the scheme is an appropriate investment for a superannuation fund. The trustees of superannuation funds are advised that no consideration has been given in this Product Ruling as to whether investment in this scheme may contravene the provisions of SISA. | Qualifications: 8. The class of entities defined in this Product Ruling may rely on it provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 16 to 20 of this Product Ruling. 9. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then: 10. This Product Ruling applies from 1 July 2019. It therefore applies only to the specified class of entities that enter into the scheme from 1 July 2019 until 30 June 2022, 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. 11. 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: 12. 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. 13. 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: 14. 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. 15. Subject to paragraph 3 of this Product Ruling and the assumptions in paragraph 20 of this Product Ruling: 16. The scheme that is the subject of this Product 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. 17. 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. Unless otherwise defined, capitalised terms in this Product Ruling take their meaning as per the PDS and Trust Deed. 18. All Australian Securities and Investments Commission requirements are, or will be, complied with for the term of the agreements. 19. Following is a summary of the scheme: | Assumptions: 20. This Product Ruling is made on the basis of the following necessary assumptions: Commissioner of Taxation 4 September 2019 | Section 8-1 and Division 247 - capital protected borrowings and deductibility of interest: 21. The interest paid on a borrowing used to acquire income producing assets such as 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 Income tax: subsection 51(1) - relevance of subjective purpose, motive or intention in determining the deductibility of losses and outgoings ). However, the ability to claim interest deductions may be subject to Division 247. 22. 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. 23. Division 247 applies to the Loan where the investor uses the Loan to acquire a Beneficial Interest in a Parcel of Securities and the investor is protected against the fall in the market value of the Parcel of Securities. 24. 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). 25. Where the Capital Protection Fee is factored into the interest rate charged on the Loan and there is no separate charge payable by an investor for the Put Option: 26. Where the investor elects to pay the Capital Protection Fee as an upfront lump sum: 27. Where an investor has acquired multiple Parcels of Securities and the Bank has applied a single Interest Rate across the Portfolio, the investment will be treated as one arrangement for the purposes of Division 247. However, as there is a separate Put Option provided in respect of each Parcel of Securities in the Portfolio, the cost of the investor's Capital Protection will need to be reasonably apportioned to each Put Option having regard to the size of each Parcel. 28. There is no element of capital protection connected with the Interest Loan. No part of the interest incurred by the investor on the Interest Loan for the income year will therefore be attributable to the cost of capital protection and the interest on the Interest Loan will be fully deductible under section 8-1. | Section 51AAA: 29. By acquiring a Parcel or Parcels of 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 Loan and Interest Loan would have been deductible under section 8-1 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 the PEL. | Section 82KL: 30. 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. | Subdivision H of Division 3 of Part III: 31. 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 the carrying on of a business, whether the investor is a small or medium 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 for the purposes of Subdivision H: 32. 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: 33. The interest charged on the Loan and the Interest Loan that is deductible under section 8-1 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, in respect of the Loan, not to the period of the Loan. | Sections 82KZME and 82KZMF - prepaid expenditure and 'tax shelter' style arrangements: 34. 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. 35. 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 the participation in the PEL, including the financing, Securities acquisition and Securities disposal arrangements. 36. Exception 1, as contained in subsection 82KZME(5) of the ITAA 1936, applies to exclude interest payable under the Loan and Interest Loan from the operation of section 82KZMF of the ITAA 1936 where: 37. Deductibility of the prepaid interest must therefore be considered under the prepayment rules contained in paragraphs 38 to 43 of this Product Ruling. | Section 82KZM - prepaid expenditure incurred by certain small and medium business entities and individuals incurring non-business expenditure: 38. 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: 39. 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. 40. As the eligible service period in relation to the deductible interest payment under the Loan and Interest 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 referred to in paragraph 38 of this Product Ruling. Such investors will be able to claim an immediate deduction allowable under section 8-1 for the interest incurred under the Loan and Interest Loan. | Sections 82KZMA and 82KZMD - prepaid non-business expenditure incurred by non-individual and non-small and medium business entities: 41. Sections 82KZMA and 82KZMD of the ITAA 1936 set the amount and timing of deductions for expenditure incurred by an investor (other than a small business entity or an entity covered by subsection 82KZMA(2A) of the ITAA 1936 [5] , 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. 42. 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. 43. For these investors, the amount of prepaid interest incurred under the Loan and Interest Loan which is allowable as a deduction under section 8-1 will be apportioned over the relevant interest payment period. | Division 235 - look-through treatment for instalment trusts: 44. The object of Division 235 is to ensure that, for most income tax purposes, the consequences of ownership of a certain type of asset (referred to as an 'instalment trust asset') flow to the investor that has a beneficial interest in that asset as the beneficiary of an 'instalment trust', instead of to the trustee of the instalment trust. Essentially, this means treating the investor (and not the trust) as the owner of the asset and treating any act done by the trustee in relation to the asset as if the act had been done by the investor (instead of by the trustee): subsections 235-820(1) and 235-820(2). 45. Each Separate Trust created under the terms of the Trust Deed for the purposes of holding a Parcel of Securities on trust by the Security Trustee as trustee for an investor (other than a SMSF Investor), will be an instalment trust pursuant to paragraph 235-825(1)(a) on the basis that they will be covered by section 235-830 (about instalment trust arrangements), and satisfy the requirements in section 235-835 (about the type of asset being held on trust). 46. Each Separate Trust created under the terms of the Trust Deed for the purposes of holding a Parcel of Securities of a SMSF Investor on trust by the Security Trustee as trustee for a SMSF Investor, will be an instalment trust pursuant to paragraph 235-825(1)(b) on the basis that they will be covered by section 235-840 (about limited recourse borrowings by regulated superannuation funds). | Dividends and distributions: 47. Pursuant to the operation of section 235-820 (as per paragraphs 15(i) and 44 to 46 of this Product Ruling): | Part 3-1 - application of CGT provisions to the Securities and the Put Option: 48. If an investor's Put Option is exercised and the investor elects to have the relevant parcel of Securities sold to the Bank, CGT event A1 will arise for the investor in respect of the disposal of the Parcel of Securities (section 104-10). Under item 2 of the table in subsection 134-1(1), the investor's cost base and reduced cost base of the Parcel of Securities will include the cost of the Put Option as worked out under Division 247 plus the Capital Protection Fee (where paid as an upfront lump sum). Any capital gain or capital loss made by the investor on the exercise of the Put Option will be disregarded (subsection 134-1(4)). 49. 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 a Parcel of 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 the Parcel of Securities for more than 12 months (excluding the days of acquisition and disposal). 50. Where the Put Option expires unexercised, CGT event C2 will arise for the investor in relation to the Put Option at that time (section 104-25). As the investor will not receive any capital proceeds in respect of the expiry of the 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 the Put Option will include its cost as worked out under Division 247 plus the Capital Protection Fee (where paid as an upfront lump sum). | Reduced Rate Facility: 51. The grant of a right by the investor to the Bank under the Reduced Rate Facility, that is, the Bank's right to a Cash Settlement Amount, gives rise to a CGT event D1 under section 104-35. This event will not result in a capital gain or loss arising for the investor (paragraph 116-30(3)(b)). 52. Under subsection 108-5(1) a CGT asset is any kind of property or a legal or equitable right that is not property. The right of an investor under the Reduced Rate Facility, that is, the right to a reduced Capital Protection Fee, is a legally enforceable right and therefore a CGT asset according to the definition in subsection 108-5(1). 53. At Maturity, the investor's ownership of the contractual right under the Reduced Rate Facility is discharged or satisfied. This discharge or satisfaction of the contractual right gives rise to CGT event C2 (paragraph 104-25(1)(b)). 54. Any Cash Settlement Amount paid by the investor under the Reduced Rate Facility, that is the difference between the Closing Value of the Parcel of Securities on the Maturity Date and the Cap Value, is capital expenditure made to acquire the contractual right referred to in paragraph 52 of this Product Ruling and will be included in the investor's reduced cost base in that CGT asset (section 110-55). The investor will make a capital loss from this CGT event equal to the reduced cost base of their right under the Reduced Rate Facility. | Division 245 - commercial debt forgiveness: 55. If an SMSF Investor fails to repay the Loan (or satisfy any of its obligations under the PEL), the Bank will be entitled to call on the Guarantee and Indemnity for this shortfall and will seek to recover the amount from the Guarantor. In this regard, any payment by the Guarantor to the Bank will meet the liability of the SMSF Investor to the Bank. Accordingly, there should be no forgiveness of a debt by the Bank for the purposes of Division 245 in these circumstances (section 245-35). | Division 230 - Taxation of financial arrangements: 56. Division 230 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 apply to financial arrangements has not been made, then pursuant to section 230-455, Division 230 does not apply in relation to gains or losses from a financial arrangement held by: | Section 25-25 - Application Fee: 57. The Application Fee incurred by an investor upon successful application for a Loan will be an allowable deduction pursuant to section 25-25 because it is a cost of borrowing money which is used for the purpose of producing assessable income. The Application Fee will be deductible on a straight line basis over the period of the shorter of: | Part IVA - anti-avoidance: 58. Provided that the scheme ruled on is entered into and carried out as described in this Product 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) who applied for the Product Ruling, and their associates, will abide by strict terms of use. Any failure to comply with the terms of use may lead to the withdrawal of this Product Ruling. 1. This 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 that takes part in the scheme to which this Product Ruling relates. All legislative references in this Product 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 Westpac Protected Equity Loan (the PEL) offered by Westpac Banking Corporation (the Bank) and issued under the Westpac Protected Equity Loan Product Disclosure Statement dated 22 July 2013 (PDS), as supplemented by the Supplementary Product Disclosure Statement dated 30 May 2014, the Supplementary Product Disclosure Statement dated 1 December 2015, the Notice to investors dated 12 November 2016, the Notice to investors dated 30 October 2018 and the Notice to investors dated 1 July 2019. 3. This Product Ruling does not address: | Class of entities: 4. 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. 5. The class of entities that can rely on the Ruling section of this Product Ruling consists of those entities that are accepted to participate in the scheme specified in this Ruling on or after 1 July 2019 and on or before 30 June 2022. 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. 6. The class of entities that can rely on this Product Ruling does not include entities that: | Superannuation Industry (Supervision) Act 1993: 7. This Product Ruling does not address the provisions of the Superannuation Industry (Supervision) Act 1993 (SISA). The Commissioner gives no assurance that the scheme is an appropriate investment for a superannuation fund. The trustees of superannuation funds are advised that no consideration has been given in this Product Ruling as to whether investment in this scheme may contravene the provisions of SISA. | Qualifications: 8. The class of entities defined in this Product Ruling may rely on it provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 16 to 20 of this Product Ruling. 9. 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: 21. The interest paid on a borrowing used to acquire income producing assets such as 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 Income tax: subsection 51(1) - relevance of subjective purpose, motive or intention in determining the deductibility of losses and outgoings ). However, the ability to claim interest deductions may be subject to Division 247. 22. 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. 23. Division 247 applies to the Loan where the investor uses the Loan to acquire a Beneficial Interest in a Parcel of Securities and the investor is protected against the fall in the market value of the Parcel of Securities. 24. 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). 25. Where the Capital Protection Fee is factored into the interest rate charged on the Loan and there is no separate charge payable by an investor for the Put Option: 26. Where the investor elects to pay the Capital Protection Fee as an upfront lump sum: 27. Where an investor has acquired multiple Parcels of Securities and the Bank has applied a single Interest Rate across the Portfolio, the investment will be treated as one arrangement for the purposes of Division 247. However, as there is a separate Put Option provided in respect of each Parcel of Securities in the Portfolio, the cost of the investor's Capital Protection will need to be reasonably apportioned to each Put Option having regard to the size of each Parcel. 28. There is no element of capital protection connected with the Interest Loan. No part of the interest incurred by the investor on the Interest Loan for the income year will therefore be attributable to the cost of capital protection and the interest on the Interest Loan will be fully deductible under section 8-1. | Section 51AAA: 29. By acquiring a Parcel or Parcels of 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 Loan and Interest Loan would have been deductible under section 8-1 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 the PEL. | Section 82KL: 30. 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. | Subdivision H of Division 3 of Part III: 31. 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 the carrying on of a business, whether the investor is a small or medium 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 for the purposes of Subdivision H: 32. 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: 33. The interest charged on the Loan and the Interest Loan that is deductible under section 8-1 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, in respect of the Loan, not to the period of the Loan. | Sections 82KZME and 82KZMF - prepaid expenditure and 'tax shelter' style arrangements: 34. 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. 35. 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 the participation in the PEL, including the financing, Securities acquisition and Securities disposal arrangements. 36. Exception 1, as contained in subsection 82KZME(5) of the ITAA 1936, applies to exclude interest payable under the Loan and Interest Loan from the operation of section 82KZMF of the ITAA 1936 where: 37. Deductibility of the prepaid interest must therefore be considered under the prepayment rules contained in paragraphs 38 to 43 of this Product Ruling. | Section 82KZM - prepaid expenditure incurred by certain small and medium business entities and individuals incurring non-business expenditure: 38. 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: 39. 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. 40. As the eligible service period in relation to the deductible interest payment under the Loan and Interest 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 referred to in paragraph 38 of this Product Ruling. Such investors will be able to claim an immediate deduction allowable under section 8-1 for the interest incurred under the Loan and Interest Loan. | Sections 82KZMA and 82KZMD - prepaid non-business expenditure incurred by non-individual and non-small and medium business entities: 41. Sections 82KZMA and 82KZMD of the ITAA 1936 set the amount and timing of deductions for expenditure incurred by an investor (other than a small business entity or an entity covered by subsection 82KZMA(2A) of the ITAA 1936 [5] , 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. 42. 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. 43. For these investors, the amount of prepaid interest incurred under the Loan and Interest Loan which is allowable as a deduction under section 8-1 will be apportioned over the relevant interest payment period. | Division 235 - look-through treatment for instalment trusts: 44. The object of Division 235 is to ensure that, for most income tax purposes, the consequences of ownership of a certain type of asset (referred to as an 'instalment trust asset') flow to the investor that has a beneficial interest in that asset as the beneficiary of an 'instalment trust', instead of to the trustee of the instalment trust. Essentially, this means treating the investor (and not the trust) as the owner of the asset and treating any act done by the trustee in relation to the asset as if the act had been done by the investor (instead of by the trustee): subsections 235-820(1) and 235-820(2). 45. Each Separate Trust created under the terms of the Trust Deed for the purposes of holding a Parcel of Securities on trust by the Security Trustee as trustee for an investor (other than a SMSF Investor), will be an instalment trust pursuant to paragraph 235-825(1)(a) on the basis that they will be covered by section 235-830 (about instalment trust arrangements), and satisfy the requirements in section 235-835 (about the type of asset being held on trust). 46. Each Separate Trust created under the terms of the Trust Deed for the purposes of holding a Parcel of Securities of a SMSF Investor on trust by the Security Trustee as trustee for a SMSF Investor, will be an instalment trust pursuant to paragraph 235-825(1)(b) on the basis that they will be covered by section 235-840 (about limited recourse borrowings by regulated superannuation funds). | Dividends and distributions: 47. Pursuant to the operation of section 235-820 (as per paragraphs 15(i) and 44 to 46 of this Product Ruling): | Part 3-1 - application of CGT provisions to the Securities and the Put Option: 48. If an investor's Put Option is exercised and the investor elects to have the relevant parcel of Securities sold to the Bank, CGT event A1 will arise for the investor in respect of the disposal of the Parcel of Securities (section 104-10). Under item 2 of the table in subsection 134-1(1), the investor's cost base and reduced cost base of the Parcel of Securities will include the cost of the Put Option as worked out under Division 247 plus the Capital Protection Fee (where paid as an upfront lump sum). Any capital gain or capital loss made by the investor on the exercise of the Put Option will be disregarded (subsection 134-1(4)). 49. 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 a Parcel of 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 the Parcel of Securities for more than 12 months (excluding the days of acquisition and disposal). 50. Where the Put Option expires unexercised, CGT event C2 will arise for the investor in relation to the Put Option at that time (section 104-25). As the investor will not receive any capital proceeds in respect of the expiry of the 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 the Put Option will include its cost as worked out under Division 247 plus the Capital Protection Fee (where paid as an upfront lump sum). | Reduced Rate Facility: 51. The grant of a right by the investor to the Bank under the Reduced Rate Facility, that is, the Bank's right to a Cash Settlement Amount, gives rise to a CGT event D1 under section 104-35. This event will not result in a capital gain or loss arising for the investor (paragraph 116-30(3)(b)). 52. Under subsection 108-5(1) a CGT asset is any kind of property or a legal or equitable right that is not property. The right of an investor under the Reduced Rate Facility, that is, the right to a reduced Capital Protection Fee, is a legally enforceable right and therefore a CGT asset according to the definition in subsection 108-5(1). 53. At Maturity, the investor's ownership of the contractual right under the Reduced Rate Facility is discharged or satisfied. This discharge or satisfaction of the contractual right gives rise to CGT event C2 (paragraph 104-25(1)(b)). 54. Any Cash Settlement Amount paid by the investor under the Reduced Rate Facility, that is the difference between the Closing Value of the Parcel of Securities on the Maturity Date and the Cap Value, is capital expenditure made to acquire the contractual right referred to in paragraph 52 of this Product Ruling and will be included in the investor's reduced cost base in that CGT asset (section 110-55). The investor will make a capital loss from this CGT event equal to the reduced cost base of their right under the Reduced Rate Facility. | Division 245 - commercial debt forgiveness: 55. If an SMSF Investor fails to repay the Loan (or satisfy any of its obligations under the PEL), the Bank will be entitled to call on the Guarantee and Indemnity for this shortfall and will seek to recover the amount from the Guarantor. In this regard, any payment by the Guarantor to the Bank will meet the liability of the SMSF Investor to the Bank. Accordingly, there should be no forgiveness of a debt by the Bank for the purposes of Division 245 in these circumstances (section 245-35). | Division 230 - Taxation of financial arrangements: 56. Division 230 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 apply to financial arrangements has not been made, then pursuant to section 230-455, Division 230 does not apply in relation to gains or losses from a financial arrangement held by: | Section 25-25 - Application Fee: 57. The Application Fee incurred by an investor upon successful application for a Loan will be an allowable deduction pursuant to section 25-25 because it is a cost of borrowing money which is used for the purpose of producing assessable income. The Application Fee will be deductible on a straight line basis over the period of the shorter of: | Part IVA - anti-avoidance: 58. Provided that the scheme ruled on is entered into and carried out as described in this Product 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: | 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 the Ruling. That is, you will not pay any more tax or penalties or interest in respect of the matters covered by this Ruling. | Further, if we think that this Ruling disadvantages you, we may apply the law in a way that is more favourable to you. | [ Note: This is a consolidated version of this document. Refer to the Legal database (ato.gov.au/law) to check its currency and to view the details of all changes.] | 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: PR 2013/20 PR 2016/10 TR 95/33
Legislative references: ITAA 1936 ITAA 1936 44(1) 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 82KZM(1A) ITAA 1936 82KZMA ITAA 1936 82KZMA(2) 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(1)(a) ITAA 1936 Pt IIIAA Div 1A ITAA 1936 Pt III Div 16E ITAA 1936 Pt IVA ITAA 1997 ITAA 1997 8-1 ITAA 1997 25-25 ITAA 1997 Subdiv 83A-B ITAA 1997 Subdiv 83A-C ITAA 1997 Pt 3-1 ITAA 1997 104-10 ITAA 1997 104-25 ITAA 1997 104-25(1)(b) ITAA 1997 104-25(1)(c) ITAA 1997 104-25(3) ITAA 1997 104-35 ITAA 1997 108-5(1) ITAA 1997 110-55 ITAA 1997 Div 115 ITAA 1997 115-5 ITAA 1997 116-30(3)(b) ITAA 1997 134-1(1) ITAA 1997 134-1(4) ITAA 1997 Div 207 ITAA 1997 Div 230 ITAA 1997 230-455 ITAA 1997 230-455(7) ITAA 1997 Div 235 ITAA 1997 235-815(2) ITAA 1997 235-820 ITAA 1997 235-820(1) ITAA 1997 235-820(2) ITAA 1997 235-825(1)(a) ITAA 1997 235-825(1)(b) ITAA 1997 235-830 ITAA 1997 235-835 ITAA 1997 235-835(1)(b) ITAA 1997 235-840 ITAA 1997 Div 245 ITAA 1997 245-35 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(6) ITAA 1997 Subdiv 328-C ITAA 1997 328-110 ITAA 1997 328-110(1) SISA 1993 SISA 1993 19 SISA 1993 67A(1) TAA 1953