Product Ruling PR 2012/20
Date of effect: 23 May 2012

What this ruling is about: 1. This Product Ruling sets out the Commissioner's opinion on the way in which the relevant provision(s) identified in the Ruling section apply to the defined class of entities, who take part in the scheme to which this Ruling relates. All legislative references in this Ruling are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise indicated. 2. In this Product Ruling the scheme is referred to as the Tailored Share Facility offered by the Australia and New Zealand Banking Group Limited (ANZ), which is a financial product issued under the Tailored Share Facility Information Memorandum (IM). 3. This Product Ruling does not address: Class of entities 4. The class of entities who can rely on this Product Ruling consists of those entities that are accepted to participate in the scheme specified below on or after the date this Product Ruling is published and on or before 30 June 2015. 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 from this involvement. These entities are referred to as investor(s). 5. The class of entities who can rely on this Product Ruling does not include entities who: Superannuation Industry (Supervision) Act 1993 6. 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 7. 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 Ruling. 8. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then: 9. This work is copyright. Apart from any use as permitted under the Copyright Act 1968 , no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to:

Class of entities or scheme: 4. The class of entities who can rely on this Product Ruling consists of those entities that are accepted to participate in the scheme specified below on or after the date this Product Ruling is published and on or before 30 June 2015. 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 from this involvement. These entities are referred to as investor(s). 5. The class of entities who can rely on this Product Ruling does not include entities who: | Superannuation Industry (Supervision) Act 1993: 6. 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: 7. 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 Ruling. 8. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then: 9. 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: 10. This Product Ruling applies prospectively from 23 May 2012, the date it is published. It therefore applies only to the specified class of entities that enter into the scheme from 23 May 2012 until 30 June 2015 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. | Application of this Ruling: 15. Subject to paragraph 3 of this Ruling and the assumptions in paragraph 20 of this Ruling: 16. The scheme that is the subject of this Product Ruling is described below. The scheme is incorporated within 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 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. 18. Unless otherwise defined, capitalised terms in this Product Ruling take their meaning as per the draft IM. Any use of the singular also includes the plural unless otherwise specified. | Overview: 19. Following is a summary of the scheme: | Assumptions: 20. This Ruling is made on the basis of the following necessary assumptions: Commissioner of Taxation 23 May 2012 | 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). 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, where that borrowing is made for the purpose of investing in those securities. 23. Division 247 applies to the Loan, as: 24. Division 247 sets out a methodology for reasonably attributing the cost of capital protection incurred by a borrower under a capital protected borrowing. Division 247 ignores any amount which is not in substance for capital protection or interest in calculating the cost of capital protection, pursuant to subsection 247-20(3). 25. There is a cost of capital protection in an income year if the aggregate of the interest on the amount borrowed exceeds the total interest that would have been incurred for the year if the interest rate on the amount borrowed had been the adjusted loan rate (as determined when the interest rate is fixed or, if the interest rate is variable, the average of the adjusted loan rates during the variable interest rate period). 26. As there is no separate charge payable by an investor in the Tailored Share Facility for a put option, the cost of capital protection is the amount worked out under subsection 247-20(3). 27. For an investor in the Tailored Share Facility, the investor's Protection is a capital asset. As the cost of capital protection is the cost of the investor's Protection, this expense is capital in nature. The interest charge on the Loan will be deductible under section 8-1 only to the extent that it is not for the cost of capital protection. 28. Where an investor has acquired multiple Parcels of Securities (and applied the Basket investment structure) and ANZ has applied a single blended interest rate across all the Parcels of Securities held by the investor in the Basket, the investment will be treated as one arrangement for the purposes of Division 247. | Section 51AAA: 29. By acquiring the Securities, it is contemplated that an investor will derive assessable income by way of the receipt of dividend income or trust distributions and capital gains. As interest would have been deductible under section 8-1 of the ITAA 1997 notwithstanding the inclusion of a net capital gain in assessable income, section 51AAA of the ITAA 1936 has no application to an investor who enters into the Tailored Share Facility. | 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 of the ITAA 1997. | Subdivision H of Division 3 of Part III: 31. Subdivision H of Division 3 of Part III (Subdivision H) of the ITAA 1936 deals with the timing of deductions for certain advance expenditure incurred under an agreement in return for the doing of a thing under that agreement that will not be wholly done within the same year of income. Separate rules apply depending on whether the expenditure is incurred in the carrying on of a business, whether the investor is a small business entity, whether the investor is an individual and whether the investor is not an individual and incurs the expenditure otherwise than in carrying on a business. This Subdivision does not apply to 'excluded expenditure' which is defined in subsection 82KZL(1) of the ITAA 1936 to include amounts of less than $1,000 or amounts that are of a capital nature. | Subdivision 328-C - small business entities: 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 charge on the Loan deductible under section 8-1 of the ITAA 1997 is in relation to a prepayment of loan interest for a period that is 12 months or less. Paragraph 82KZL(2)(a) of the ITAA 1936 provides that a payment of interest that is made in return for the making available of a loan principal is to be taken, for the purposes of Subdivision H, to be expenditure incurred under an agreement in return for the doing of a thing under the agreement for the period to which the interest payment relates. The eligible service period in relation to a payment of loan interest is determined by reference to the period to which the interest relates, and not to the period of the Loan. | Sections 82KZME and 82KZMF - prepaid expenditure and 'tax shelter' style arrangements: 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 Tailored Share Facility, 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 the amount allowable for interest on borrowings under the Loan from the operation of section 82KZMF of the ITAA 1936, as: 37. Deductibility of the prepaid interest must therefore be considered under the prepayment rules contained in paragraphs 38 to 43 of this Ruling. | Section 82KZM - prepaid expenditure incurred by certain small 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 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. 40. As the eligible service period in relation to the deductible interest payment under the Loan is not more than 12 months and does not end after the last day of the year of income after the one in which the expenditure was incurred, section 82KZM of the ITAA 1936 will have no application to investors who are a small business entity for the year of income that has not chosen to apply section 82KZMD of the ITAA 1936 to the expenditure, or to investors who are individuals where the expenditure is not incurred in carrying on a business. Investors who satisfy these tests will be able to claim an immediate deduction for the interest allowable under section 8-1 of the ITAA 1997 incurred under the Loan. | Section 82KZMD - prepaid non-business expenditure incurred by non-individual and non-small business entities: 41. Section 82KZMD of the ITAA 1936 sets the amount and timing of deductions for expenditure for an investor (other than a small business entity for the year of income that has not chosen to apply section 82KZMD to the expenditure) that is not an individual and does not incur the expenditure in carrying on a business. 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 taxpayers, the amount of prepaid interest incurred under the Loan which is allowable as a deduction under section 8-1 will be apportioned over the relevant interest payment period. | Sections 110-25, 110-55 and 134-1 - cost base of the investor's Protection and the Securities: 44. The cost of capital protection forms part of the cost base and reduced cost base of the Securities pursuant to section 134-1 if the Protection is exercised and the investor transfers the Securities to ANZ. 45. The cost of capital protection forms part of the reduced cost base of the Protection under section 110-55 if the Protection is not exercised. 46. The investor's cost base and reduced cost base in the Securities will include the amount of the Loan used to finance the acquisition of the Securities, their Contribution (if any) and incidental costs incurred by the investor in acquiring and disposing of the Securities (this includes stamp duty and costs of transfer) under section 110-25 and 110-55 respectively. | Section 109-5 - time of acquisition: 47. For CGT purposes, the investor's date of acquisition of their interest in the Securities is the Commencement Date pursuant to subsection 109-5(2). | Sections 104-10, 104-25 and 134-1: 48. If the Protection is exercised at the Maturity Date by transferring title to the Securities to ANZ and the proceeds are applied in repaying the Loan, any gain or loss on exercise of the Protection is disregarded (subsection 134-1(4)). The investor will include the cost base of the Protection in the second element of the cost base and reduced cost base of the Securities disposed to ANZ (item 2 of subsection 134-1(1)). 49. If the Protection is not exercised at the Maturity Date, the Protection expires and the investor will make a capital loss at that time, equal to the reduced cost base of the Protection (CGT Event C2, paragraph 104-25(1)(c)). | The Protected Reduced Rate Facility: 50. The grant of a right by the investor to ANZ under the Protected Reduced Rate Facility 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)). 51. 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 Protected Reduced Rate Facility, that is, the right to a reduced rate of interest on their Loan, is a legally enforceable right and therefore a CGT asset according to the definition in subsection 108-5(1). 52. At maturity, the investor's ownership of the contractual right under the Protected 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)). 53. The amount paid by the investor under the Protected Reduced Rate Facility, that is the difference between the Closing Price of the Parcel or Basket on the Maturity Date and the Cap Level, is capital expenditure made to acquire the contractual right referred to in paragraph 51 of this Product Ruling and will be included in the investor's reduced cost base in that CGT asset (subsections 110-25(2) and 110-55(2)). The investor will make a capital loss from this CGT event equal to the reduced cost base of their right under the Protected Reduced Rate Facility. | Section 115-5 - discount capital gains: 54. 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 Securities will be treated as a discount capital gain where the investor is an individual or a trust and has held the Securities for more than 12 months (excluding the days of acquisition and disposal). | Part IVA: 55. Provided that the arrangement ruled on is entered into and carried out as described (see the Scheme part of this Ruling), it will be accepted as an ordinary commercial transaction and Part IVA of the ITAA 1936 will not apply. 56. The following is a detailed contents list for this Ruling: Not previously issued as a draft

Ruling: 15. Subject to paragraph 3 of this Ruling and the assumptions in paragraph 20 of this Ruling: 16. The scheme that is the subject of this Product Ruling is described below. The scheme is incorporated within 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 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. 18. Unless otherwise defined, capitalised terms in this Product Ruling take their meaning as per the draft IM. Any use of the singular also includes the plural unless otherwise specified. | Overview: 19. Following is a summary of the scheme: | Assumptions: 20. This Ruling is made on the basis of the following necessary assumptions: Commissioner of Taxation 23 May 2012 | 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). 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, where that borrowing is made for the purpose of investing in those securities. 23. Division 247 applies to the Loan, as: 24. Division 247 sets out a methodology for reasonably attributing the cost of capital protection incurred by a borrower under a capital protected borrowing. Division 247 ignores any amount which is not in substance for capital protection or interest in calculating the cost of capital protection, pursuant to subsection 247-20(3). 25. There is a cost of capital protection in an income year if the aggregate of the interest on the amount borrowed exceeds the total interest that would have been incurred for the year if the interest rate on the amount borrowed had been the adjusted loan rate (as determined when the interest rate is fixed or, if the interest rate is variable, the average of the adjusted loan rates during the variable interest rate period). 26. As there is no separate charge payable by an investor in the Tailored Share Facility for a put option, the cost of capital protection is the amount worked out under subsection 247-20(3). 27. For an investor in the Tailored Share Facility, the investor's Protection is a capital asset. As the cost of capital protection is the cost of the investor's Protection, this expense is capital in nature. The interest charge on the Loan will be deductible under section 8-1 only to the extent that it is not for the cost of capital protection. 28. Where an investor has acquired multiple Parcels of Securities (and applied the Basket investment structure) and ANZ has applied a single blended interest rate across all the Parcels of Securities held by the investor in the Basket, the investment will be treated as one arrangement for the purposes of Division 247. | Section 51AAA: 29. By acquiring the Securities, it is contemplated that an investor will derive assessable income by way of the receipt of dividend income or trust distributions and capital gains. As interest would have been deductible under section 8-1 of the ITAA 1997 notwithstanding the inclusion of a net capital gain in assessable income, section 51AAA of the ITAA 1936 has no application to an investor who enters into the Tailored Share Facility. | 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 of the ITAA 1997. | Subdivision H of Division 3 of Part III: 31. Subdivision H of Division 3 of Part III (Subdivision H) of the ITAA 1936 deals with the timing of deductions for certain advance expenditure incurred under an agreement in return for the doing of a thing under that agreement that will not be wholly done within the same year of income. Separate rules apply depending on whether the expenditure is incurred in the carrying on of a business, whether the investor is a small business entity, whether the investor is an individual and whether the investor is not an individual and incurs the expenditure otherwise than in carrying on a business. This Subdivision does not apply to 'excluded expenditure' which is defined in subsection 82KZL(1) of the ITAA 1936 to include amounts of less than $1,000 or amounts that are of a capital nature. | Subdivision 328-C - small business entities: 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 charge on the Loan deductible under section 8-1 of the ITAA 1997 is in relation to a prepayment of loan interest for a period that is 12 months or less. Paragraph 82KZL(2)(a) of the ITAA 1936 provides that a payment of interest that is made in return for the making available of a loan principal is to be taken, for the purposes of Subdivision H, to be expenditure incurred under an agreement in return for the doing of a thing under the agreement for the period to which the interest payment relates. The eligible service period in relation to a payment of loan interest is determined by reference to the period to which the interest relates, and not to the period of the Loan. | Sections 82KZME and 82KZMF - prepaid expenditure and 'tax shelter' style arrangements: 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 Tailored Share Facility, 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 the amount allowable for interest on borrowings under the Loan from the operation of section 82KZMF of the ITAA 1936, as: 37. Deductibility of the prepaid interest must therefore be considered under the prepayment rules contained in paragraphs 38 to 43 of this Ruling. | Section 82KZM - prepaid expenditure incurred by certain small 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 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. 40. As the eligible service period in relation to the deductible interest payment under the Loan is not more than 12 months and does not end after the last day of the year of income after the one in which the expenditure was incurred, section 82KZM of the ITAA 1936 will have no application to investors who are a small business entity for the year of income that has not chosen to apply section 82KZMD of the ITAA 1936 to the expenditure, or to investors who are individuals where the expenditure is not incurred in carrying on a business. Investors who satisfy these tests will be able to claim an immediate deduction for the interest allowable under section 8-1 of the ITAA 1997 incurred under the Loan. | Section 82KZMD - prepaid non-business expenditure incurred by non-individual and non-small business entities: 41. Section 82KZMD of the ITAA 1936 sets the amount and timing of deductions for expenditure for an investor (other than a small business entity for the year of income that has not chosen to apply section 82KZMD to the expenditure) that is not an individual and does not incur the expenditure in carrying on a business. 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 taxpayers, the amount of prepaid interest incurred under the Loan which is allowable as a deduction under section 8-1 will be apportioned over the relevant interest payment period. | Sections 110-25, 110-55 and 134-1 - cost base of the investor's Protection and the Securities: 44. The cost of capital protection forms part of the cost base and reduced cost base of the Securities pursuant to section 134-1 if the Protection is exercised and the investor transfers the Securities to ANZ. 45. The cost of capital protection forms part of the reduced cost base of the Protection under section 110-55 if the Protection is not exercised. 46. The investor's cost base and reduced cost base in the Securities will include the amount of the Loan used to finance the acquisition of the Securities, their Contribution (if any) and incidental costs incurred by the investor in acquiring and disposing of the Securities (this includes stamp duty and costs of transfer) under section 110-25 and 110-55 respectively. | Section 109-5 - time of acquisition: 47. For CGT purposes, the investor's date of acquisition of their interest in the Securities is the Commencement Date pursuant to subsection 109-5(2). | Sections 104-10, 104-25 and 134-1: 48. If the Protection is exercised at the Maturity Date by transferring title to the Securities to ANZ and the proceeds are applied in repaying the Loan, any gain or loss on exercise of the Protection is disregarded (subsection 134-1(4)). The investor will include the cost base of the Protection in the second element of the cost base and reduced cost base of the Securities disposed to ANZ (item 2 of subsection 134-1(1)). 49. If the Protection is not exercised at the Maturity Date, the Protection expires and the investor will make a capital loss at that time, equal to the reduced cost base of the Protection (CGT Event C2, paragraph 104-25(1)(c)). | The Protected Reduced Rate Facility: 50. The grant of a right by the investor to ANZ under the Protected Reduced Rate Facility 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)). 51. 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 Protected Reduced Rate Facility, that is, the right to a reduced rate of interest on their Loan, is a legally enforceable right and therefore a CGT asset according to the definition in subsection 108-5(1). 52. At maturity, the investor's ownership of the contractual right under the Protected 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)). 53. The amount paid by the investor under the Protected Reduced Rate Facility, that is the difference between the Closing Price of the Parcel or Basket on the Maturity Date and the Cap Level, is capital expenditure made to acquire the contractual right referred to in paragraph 51 of this Product Ruling and will be included in the investor's reduced cost base in that CGT asset (subsections 110-25(2) and 110-55(2)). The investor will make a capital loss from this CGT event equal to the reduced cost base of their right under the Protected Reduced Rate Facility. | Section 115-5 - discount capital gains: 54. 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 Securities will be treated as a discount capital gain where the investor is an individual or a trust and has held the Securities for more than 12 months (excluding the days of acquisition and disposal). | Part IVA: 55. Provided that the arrangement ruled on is entered into and carried out as described (see the Scheme part of this Ruling), it will be accepted as an ordinary commercial transaction and Part IVA of the ITAA 1936 will not apply. 56. The following is a detailed contents list for this Ruling: Not previously issued as a draft


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). 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, where that borrowing is made for the purpose of investing in those securities. 23. Division 247 applies to the Loan, as: 24. Division 247 sets out a methodology for reasonably attributing the cost of capital protection incurred by a borrower under a capital protected borrowing. Division 247 ignores any amount which is not in substance for capital protection or interest in calculating the cost of capital protection, pursuant to subsection 247-20(3). 25. There is a cost of capital protection in an income year if the aggregate of the interest on the amount borrowed exceeds the total interest that would have been incurred for the year if the interest rate on the amount borrowed had been the adjusted loan rate (as determined when the interest rate is fixed or, if the interest rate is variable, the average of the adjusted loan rates during the variable interest rate period). 26. As there is no separate charge payable by an investor in the Tailored Share Facility for a put option, the cost of capital protection is the amount worked out under subsection 247-20(3). 27. For an investor in the Tailored Share Facility, the investor's Protection is a capital asset. As the cost of capital protection is the cost of the investor's Protection, this expense is capital in nature. The interest charge on the Loan will be deductible under section 8-1 only to the extent that it is not for the cost of capital protection. 28. Where an investor has acquired multiple Parcels of Securities (and applied the Basket investment structure) and ANZ has applied a single blended interest rate across all the Parcels of Securities held by the investor in the Basket, the investment will be treated as one arrangement for the purposes of Division 247. | Section 51AAA: 29. By acquiring the Securities, it is contemplated that an investor will derive assessable income by way of the receipt of dividend income or trust distributions and capital gains. As interest would have been deductible under section 8-1 of the ITAA 1997 notwithstanding the inclusion of a net capital gain in assessable income, section 51AAA of the ITAA 1936 has no application to an investor who enters into the Tailored Share Facility. | 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 of the ITAA 1997. | Subdivision H of Division 3 of Part III: 31. Subdivision H of Division 3 of Part III (Subdivision H) of the ITAA 1936 deals with the timing of deductions for certain advance expenditure incurred under an agreement in return for the doing of a thing under that agreement that will not be wholly done within the same year of income. Separate rules apply depending on whether the expenditure is incurred in the carrying on of a business, whether the investor is a small business entity, whether the investor is an individual and whether the investor is not an individual and incurs the expenditure otherwise than in carrying on a business. This Subdivision does not apply to 'excluded expenditure' which is defined in subsection 82KZL(1) of the ITAA 1936 to include amounts of less than $1,000 or amounts that are of a capital nature. | Subdivision 328-C - small business entities: 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 charge on the Loan deductible under section 8-1 of the ITAA 1997 is in relation to a prepayment of loan interest for a period that is 12 months or less. Paragraph 82KZL(2)(a) of the ITAA 1936 provides that a payment of interest that is made in return for the making available of a loan principal is to be taken, for the purposes of Subdivision H, to be expenditure incurred under an agreement in return for the doing of a thing under the agreement for the period to which the interest payment relates. The eligible service period in relation to a payment of loan interest is determined by reference to the period to which the interest relates, and not to the period of the Loan. | Sections 82KZME and 82KZMF - prepaid expenditure and 'tax shelter' style arrangements: 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 Tailored Share Facility, 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 the amount allowable for interest on borrowings under the Loan from the operation of section 82KZMF of the ITAA 1936, as: 37. Deductibility of the prepaid interest must therefore be considered under the prepayment rules contained in paragraphs 38 to 43 of this Ruling. | Section 82KZM - prepaid expenditure incurred by certain small 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 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. 40. As the eligible service period in relation to the deductible interest payment under the Loan is not more than 12 months and does not end after the last day of the year of income after the one in which the expenditure was incurred, section 82KZM of the ITAA 1936 will have no application to investors who are a small business entity for the year of income that has not chosen to apply section 82KZMD of the ITAA 1936 to the expenditure, or to investors who are individuals where the expenditure is not incurred in carrying on a business. Investors who satisfy these tests will be able to claim an immediate deduction for the interest allowable under section 8-1 of the ITAA 1997 incurred under the Loan. | Section 82KZMD - prepaid non-business expenditure incurred by non-individual and non-small business entities: 41. Section 82KZMD of the ITAA 1936 sets the amount and timing of deductions for expenditure for an investor (other than a small business entity for the year of income that has not chosen to apply section 82KZMD to the expenditure) that is not an individual and does not incur the expenditure in carrying on a business. 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 taxpayers, the amount of prepaid interest incurred under the Loan which is allowable as a deduction under section 8-1 will be apportioned over the relevant interest payment period. | Sections 110-25, 110-55 and 134-1 - cost base of the investor's Protection and the Securities: 44. The cost of capital protection forms part of the cost base and reduced cost base of the Securities pursuant to section 134-1 if the Protection is exercised and the investor transfers the Securities to ANZ. 45. The cost of capital protection forms part of the reduced cost base of the Protection under section 110-55 if the Protection is not exercised. 46. The investor's cost base and reduced cost base in the Securities will include the amount of the Loan used to finance the acquisition of the Securities, their Contribution (if any) and incidental costs incurred by the investor in acquiring and disposing of the Securities (this includes stamp duty and costs of transfer) under section 110-25 and 110-55 respectively. | Section 109-5 - time of acquisition: 47. For CGT purposes, the investor's date of acquisition of their interest in the Securities is the Commencement Date pursuant to subsection 109-5(2). | Sections 104-10, 104-25 and 134-1: 48. If the Protection is exercised at the Maturity Date by transferring title to the Securities to ANZ and the proceeds are applied in repaying the Loan, any gain or loss on exercise of the Protection is disregarded (subsection 134-1(4)). The investor will include the cost base of the Protection in the second element of the cost base and reduced cost base of the Securities disposed to ANZ (item 2 of subsection 134-1(1)). 49. If the Protection is not exercised at the Maturity Date, the Protection expires and the investor will make a capital loss at that time, equal to the reduced cost base of the Protection (CGT Event C2, paragraph 104-25(1)(c)). | The Protected Reduced Rate Facility: 50. The grant of a right by the investor to ANZ under the Protected Reduced Rate Facility 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)). 51. 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 Protected Reduced Rate Facility, that is, the right to a reduced rate of interest on their Loan, is a legally enforceable right and therefore a CGT asset according to the definition in subsection 108-5(1). 52. At maturity, the investor's ownership of the contractual right under the Protected 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)). 53. The amount paid by the investor under the Protected Reduced Rate Facility, that is the difference between the Closing Price of the Parcel or Basket on the Maturity Date and the Cap Level, is capital expenditure made to acquire the contractual right referred to in paragraph 51 of this Product Ruling and will be included in the investor's reduced cost base in that CGT asset (subsections 110-25(2) and 110-55(2)). The investor will make a capital loss from this CGT event equal to the reduced cost base of their right under the Protected Reduced Rate Facility. | Section 115-5 - discount capital gains: 54. 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 Securities will be treated as a discount capital gain where the investor is an individual or a trust and has held the Securities for more than 12 months (excluding the days of acquisition and disposal). | Part IVA: 55. Provided that the arrangement ruled on is entered into and carried out as described (see the Scheme part of this Ruling), it will be accepted as an ordinary commercial transaction and Part IVA of the ITAA 1936 will not apply.


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


Related rulings: TR 95/33 PR 2009/21
Legislative references: ITAA 1936 51AAA ITAA 1936 82KL ITAA 1936 Pt III Div 3 Subdiv H ITAA 1936 82KZL(1) ITAA 1936 82KZL(2)(a) ITAA 1936 82KZM ITAA 1936 82KZMA ITAA 1936 82KZMD ITAA 1936 82KZME ITAA 1936 82KZME(4) ITAA 1936 82KZME(5) ITAA 1936 82KZME(5)(b)(ii) ITAA 1936 82KZME(5)(b)(iii) ITAA 1936 82KZMF ITAA 1936 Pt IVA ITAA 1997 ITAA 1997 8-1 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 109-5 ITAA 1997 109-5(2) ITAA 1997 110-25 ITAA 1997 110-25(2) ITAA 1997 110-55 ITAA 1997 110-55(2) ITAA 1997 Div 115 ITAA 1997 115-5 ITAA 1997 116-30(3)(b) ITAA 1997 134-1 ITAA 1997 134-1(1) ITAA 1997 134-1(4) ITAA 1997 Div 230 ITAA 1997 Div 247 ITAA 1997 247-20(3) ITAA 1997 247-20(4) ITAA 1997 247-20(5) ITAA 1997 247-20(5A) ITAA 1997 247-20(6) ITAA 1997 Subdiv 328-C ITAA 1997 328-110 ITAA 1997 328-110(1) SISA 1993 TAA 1953 Copyright Act 1968
Subject references: capital protected borrowings financial products interest expenses prepaid expenses product rulings public rulings taxation administration