Tax Laws Amendment (2006 Measures No. 7) Act 2007 (55 of 2007)
Schedule 7 Capital protected borrowings
Part 1 Main amendments
Income Tax Assessment Act 1997
1 After Division 243
Insert:
Division 247 - Capital protected borrowings
Guide to Division 247
247-1 What this Division is about
Capital protection provided under a relevant capital protected borrowing to the extent that it is not provided by an explicit put option is treated (for the borrower) as if it were a put option.
An amount attributable to capital protection under any relevant capital protected borrowing is treated (for the borrower) as a payment for a put option.
Table of sections
Operative provisions
247-5 Object of Division
247-10 What capital protected borrowing and capital protection are
247-15 Application of this Division
247-20 Treating capital protection as a put option
247-25 Number of put options
247-30 Exercise or expiry of option
Operative provisions
247-5 Object of Division
The object of this Division is to ensure that amounts for *capital protection under all relevant *capital protected borrowings are treated (for the borrower) under this Act as a payment for a put option.
247-10 What capital protected borrowing and capital protection are
(1) An *arrangement under which a *borrowing is made, or credit is provided, is a capital protected borrowing if the borrower is wholly or partly protected against a fall in the *market value of a thing (the protected thing ) to the extent that:
(a) the borrower uses the amount borrowed or credit provided to acquire the protected thing; or
(b) the borrower uses the protected thing as security for the borrowing or provision of credit.
(2) That protection is called capital protection .
247-15 Application of this Division
(1) This Division applies to a *capital protected borrowing only if the protected thing is a beneficial interest in:
(a) a *share, a unit in a unit trust or a stapled security; or
(b) an entity that holds a beneficial interest in a share, unit in a unit trust or stapled security either directly, or indirectly through one or more interposed entities.
(2) This Division applies only to borrowers under *capital protected borrowings.
(3) This Division does not apply to a *capital protected borrowing under which a *share or stapled security is acquired under an *employee share scheme.
(4) This Division does not apply to a *capital protected borrowing entered into before 1 July 2007 (except to the extent that it is extended on or after that day) unless the *share, unit in a unit trust or stapled security is listed for quotation in the official list of an *approved stock exchange.
(5) This Division does not apply to a *capital protected borrowing entered into on or after 1 July 2007 if:
(a) the protected thing is a beneficial interest in:
(i) a *share, unit or stapled security that is not listed for quotation in the official list of an *approved stock exchange; or
(ii) an entity that holds a beneficial interest in a share, unit in a unit trust or stapled security either directly, or indirectly through one or more interposed entities, that is not so listed; and
(b) one of these conditions is satisfied:
(i) for a non-listed share - the company is not a *widely held company;
(ii) for a non-listed unit - the trust is not a widely held unit trust as defined in section 272-105 in Schedule 2F to the Income Tax Assessment Act 1936;
(iii) for a non-listed stapled security - any company involved is not a widely held company and any trust involved is not such a widely held unit trust.
247-20 Treating capital protection as a put option
(1) This section applies to a borrower if:
(a) the borrower has an excess using the method statement in subsection (3) for a *capital protected borrowing entered into on or after 1 July 2007; or
(b) the borrower has an amount that is reasonably attributable to the *capital protection as mentioned in subsection (2) for a capital protected borrowing, or an extension of a capital protected borrowing, 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.
(2) For paragraph (1)(b), the amount that is reasonably attributable to the *capital protection is worked out under Division 247 of the Income Tax (Transitional Provisions) Act 1997.
(3) This is the method statement.
Method statement
Step 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.
Step 2. Work out the total interest that would have been incurred for the income year on a *borrowing or provision of credit of the same amount as under the *capital protected borrowing at the rate applicable under subsection (4) or (5).
Step 3. If the step 1 amount exceeds the step 2 amount, the excess is reasonably attributable to the *capital protection for the income year.
Example: Amounts that would be ignored under step 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.
(4) If the *capital protected borrowing is at a fixed rate for all or part of the term of the *borrowing, use the Reserve Bank of Australia’s Indicator Rate for Personal Unsecured Loans - Variable Rate (the benchmark rate ) at the time the first of the amounts referred to in step 1 of the method statement in subsection (3) was incurred during the term of the borrowing or the relevant part of the term.
(5) If the *capital protected borrowing is at a variable rate for all or part of the term of the *borrowing, use the average of the benchmark rates published by the Reserve Bank of Australia during the term of the borrowing or the relevant part of the term.
(6) If this section applies to a borrower, this Act applies as if:
(a) the borrower’s excess from the method statement in subsection (3); or
(b) the amount that is reasonably attributable to *capital protection as mentioned in paragraph (1)(b);
(reduced by any amount the borrower incurred under or in respect of the *capital protected borrowing for an explicit put option) were incurred only for a put option granted by the lender or by another entity under the *arrangement.
247-25 Number of put options
(1) If a *capital protected borrowing specifies more than one occasion on which the *capital protection can be invoked, this Act applies as if there were a separate put option for each of those occasions. So much of the amount to which subsection 247-20(6) applies as is reasonably attributable to each option is taken to have been incurred for that option.
(2) However, if a borrower may invoke the *capital protection under a *capital protected borrowing at any time up to the end of a period, or only at the end of a period, for which there is capital protection, this Act applies as if there were a single put option for that period.
247-30 Exercise or expiry of option
(1) If the *capital protection under a *capital protected borrowing is invoked:
(a) the borrower is taken to have exercised the put option; and
(b) any interest in a *share, unit in a unit trust or stapled security that is acquired by the lender or another entity under the *arrangement as a result of that capital protection being invoked is taken to have been disposed of by the borrower as a result of the exercise of the option.
(2) If the *capital protection under a *capital protected borrowing is not invoked on or before the last occasion on which it could have been, the put option is taken to have expired.
Note: If a borrower under a capital protected borrowing holds the protected things on capital account, the exercise or expiry of the put option may give rise to a capital gain or capital loss: see sections 104-25 (CGT event C2) and 134-1 (exercise of options).