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  • Entered into or extended on or after 13 May 2008

    For capital protected products entered into on or after 13 May 2008, the amount that you can reasonably attributable to capital protection is calculated using three steps.

    Step 1 is to calculate the total costs incurred by the borrower under, or in respect of, the capital protected product for the income year, ignoring amounts that are not in substance for capital protection or interest.

    Step 2 is to apply the benchmark rate, being the RBA's standard housing rate plus 100 points to the same amount of borrowing. If the borrowing is at a:

    • fixed rate you would apply the indicator variable interest rate at the time the first of the amounts in Step 1 was incurred
    • at a variable rate, you would apply the average of the indicator rates during the term of the borrowing.

    Step 3 applies if the amount under Step 1 exceeds the amount under Step 2. In this case, the excess is attributed to the capital protection for the income year. If the underlying securities you purchased under the capital protected borrowing are held on capital account, the excess would be a capital cost and would not deductible.

    If as a result of the change to the benchmark rate you were required to amend your tax returns, you only had until 29 June 2013 to do so.

    Example – Entered into or extended on or after 13 May 2008

    Hailey, an investor, decided to invest in a share portfolio using a loan with a capital protection feature in July 2011. The loan itself had an interest rate of 15%. The RBA website provided a standard variable housing interest rate of 7.8%. With the additional 100 points, the benchmark interest rate became 8.8%. This means that 6.2% of the interest is treated as a put option. Therefore, at the end of the 2011–12 financial year Hailey will prepare her tax return using the following steps:

    Step 1: Hailey calculates total interest expenses for the investment as $1,000.

    Step 2: Applying the benchmark rate to the same amount of borrowing provides an amount of $560.

    Step 3: As the amount under step 1 exceeds the amount under step 2, the excess $440 is attributed to the cost of capital protection, and – assuming the securities are held on capital account – is not deductible.

    End of example

    See also:

      Last modified: 01 Jul 2021QC 17547