Tax Laws Amendment (2006 Measures No. 7) Act 2007 (55 of 2007)

Schedule 7   Capital protected borrowings

Part 1   Main amendments

Income Tax (Transitional Provisions) Act 1997

2   Before Part 3-35

Insert:

Part 3-10 - Financial transactions

Division 247 - Interim apportionment methodology for capital protected borrowings

Table of sections

247-5 Interim apportionment methodology

247-10 Products listed on the Australian Stock Exchange that have explicit put options

247-15 Other capital protected products

247-20 The indicator method

247-25 The percentage method

247-5 Interim apportionment methodology

The methodology set out in this Division must be used to work out how much of an amount that a borrower incurs under or in respect of a capital protected borrowing is reasonably attributable to the capital protection provided under the capital protected borrowing if the capital protected borrowing, or an extension of it, is entered into at or after 9.30 am, by legal time in the Australian Capital Territory, on 16 April 2003 and before 1 July 2007.

Note: To work out how much of such an amount is reasonably attributable to the capital protection provided under a capital protected borrowing entered into on or after 1 July 2007, see Division 247 of the Income Tax Assessment Act 1997.

247-10 Products listed on the Australian Stock Exchange that have explicit put options

(1) For a capital protected borrowing that:

(a) is an instalment warrant listed on the Australian Stock Exchange; and

(b) contains an explicit put option that permits the underlying investment to be sold for at least the amount borrowed or amount of credit provided and has a separate price that reasonably reflects the market value of that option;

subsection (2) applies.

(2) If an amount is incurred:

(a) to acquire the capital protected borrowing in the primary market; or

(b) at a reset date of the borrowing under the capital protected borrowing;

the amount that is reasonably attributable to the capital protection is the amount specified by the lender under the capital protected borrowing as the cost of the put option.

(3) For a capital protected borrowing acquired on the secondary market, the amount that is reasonably attributable to the capital protection for an income year is worked out in accordance with subsection (4) or (5).

(4) If the market value of the underlying security at the time of acquisition is greater than the amount of the borrowing, the amount that is reasonably attributable to the capital protection is:

(a) the sum of the market value of the instalment warrant and the amount of the borrowing or amount of credit provided; less

(b) the sum of the market value of the underlying security and so much of the amount incurred as is attributable to pre-paid interest.

(5) If the market value of the underlying security at the time of acquisition is equal to or less than the amount of the borrowing or amount of credit provided, the amount that is reasonably attributable to the capital protection is:

(a) the market value of the instalment warrant; less

(b) any pre-paid interest.

(6) If the amount worked out in accordance with subsection (4) or (5) is less than nil, the amount that is reasonably attributable to the capital protection is nil.

247-15 Other capital protected products

(1) If section 247-10 does not apply, the total amount that is reasonably attributable to the capital protection for an income year is the greater of the amount worked out using section 247-20 (the indicator method) and section 247-25 (the percentage method). If those amounts are the same, use either one.

(2) If an arrangement involves more than one amount incurred in an income year, the total amount that is reasonably attributable to the capital protection for the year is distributed pro-rata between those amounts incurred.

247-20 The indicator method

(1) Work out the total amount incurred by the borrower under or in respect of the capital protected borrowing for the income year, ignoring amounts that are not in substance for capital protection or interest.

Example: Amounts that would be ignored under subsection (1) include amounts that are in substance the repayment of a loan or credit, the payment of an application fee or brokerage commission and the payment of stamp duty or other tax.

(2) Work out the amount that would have been incurred by applying the relevant indicator rate to a borrowing or provision of credit of the same amount for the income year.

(3) If the subsection (1) amount exceeds the subsection (2) amount, the excess is reasonably attributable to the capital protection for the income year.

(4) The relevant indicator rate is:

(a) for a capital protected borrowing based on a variable interest rate, the Reserve Bank of Australia’s Indicator Rate for Personal Unsecured Loans - Variable Rate at the time the first payment for the income year was incurred; and

(b) for another capital protected borrowing, the Reserve Bank of Australia’s Indicator Rate for Personal Unsecured Loans - Fixed Rate at the time the borrowing was entered into.

247-25 The percentage method

(1) Work out the total amount incurred by the borrower under or in respect of the capital protected borrowing for the income year, ignoring amounts that are not in substance for capital protection or interest.

Example: Amounts that would be ignored under subsection (1) include amounts that are in substance the repayment of a loan or credit, the payment of an application fee or brokerage commission and the payment of stamp duty or other tax.

(2) The amount that is reasonably attributable to the capital protection for the income year is this percentage of the total amount incurred for the income year:

(a) 40% if the term is 1 year or shorter; or

(b) 27.5% if the term is longer than 1 year but not longer than 2 years; or

(c) 20% if the term is longer than 2 years but not longer than 3 years; or

(d) 17.5% if the term is longer than 3 years but not longer than 4 years; or

(e) 15% if the term is longer than 4 years.