Edited version of private advice

Authorisation Number: 1051995803136

Date of advice: 20 June 2022

Ruling

Subject: Investment loan - income and deductions

Question 1

Are the dividends assessable income of the taxpayer within the meaning of section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes. Dividend income is classed as ordinary income and is assessable under section 6-5 of the ITAA 1997.

Question 2

If yes to 1, on what date is a dividend assessable income:

(a)  The Company's dividend payment date

(b)  The date received by the Trustee; or

(c)   The date received by the Taxpayer?

Answer

The Company's dividend payment date is the relevant date. Under subsection 44(1) of the Income Tax Assessment Act 1936 (ITAA 1936), an Australian resident shareholder is assessable on all dividends paid to the shareholder by a company out of profits derived from any source. 'Paid' is defined in subsection 6(1) of the ITAA 1936 and includes 'credited' or 'distributed'.

Question 3

Are the imputation credits arising from the dividends assessable income of the taxpayer within the meaning of section 6-5 of the ITAA 1997?

Answer

Yes. Subsection 207-20(1) of the ITAA 1997 provides that if an entity makes franked distributions to another entity, the amount of the franking distribution is included in the taxable income of the receiving entity in the year in which the distribution is made.

Question 4

Will Division 247 of the ITAA 1997 apply to the loan?

Answer

Yes. The purpose of Division 247 of the ITAA 1997 is to separately identify an appropriate portion of the total consideration paid by a borrower with respect to capital protected borrowings. You have elected to acquire a put option under the agreement, and Division 247 will apply.

Question 5

Subject to compliance with Division 247 of the Income Tax Assessment Act 1997, is the interest on the Loan charged to the Taxpayer by the Product Issuer deductible under section 8-1(1)(a) of the Income Tax Assessment Act 1997?

Answer

Yes. Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where they are of a capital, private or domestic nature, or relate to the earning of exempt income. The interest expenses associated with your investment loan are an allowable deduction.

Question 6

Subject to compliance with former section 160APHN of the ITAA 1936, is the Taxpayer eligible pursuant to section 67-25 and Division 207 of the ITAA 1997 for a refund of any excess franking tax offsets arising from the imputation credits attached to the dividends?

Answer

Yes. Under section 207-20 of the ITAA 1997, an entity that receives a franked distribution is entitled to a tax offset for the income year in which the distribution is made. As you are entitled to a tax offset under Division 207, you will also be subject to the refundable tax offset rules in Division 67.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are a resident of Australia and will remain so for the whole of the relevant period.

Your lender is a registered financial corporation with the Australian Prudential Regulatory Authority. You acquired a loan from your lender to purchase fully paid ordinary shares in a Limited company. You made the purchase mid-20XX.

You have provided relevant clauses of your agreement which detail the obligations of the parties.

Your agreement with your lender includes that your shares may be purchased in the name of the lender's nominee (the Trustee) and you retain a beneficial interest in the shares.

You must pay interest to the lender at the variable interest rate determined by the lender. The Trustee holds all the shares for your sole benefit and you are absolutely entitled to the shares.

Within a reasonable period of time following receipt of each relevant case dividend paid by the Limited Company to the Trustee, the Trustee pays you the cash dividend amount.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1936 subsection 44(1)

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 subsection 6-5(2)

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 Division 67

Income Tax Assessment Act 1997 subsection 67-25

Income Tax Assessment Act 1997 Division 207

Income Tax Assessment Act 1997 subsection 207-20(1)

Income Tax Assessment Act 1997 Division 247

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