ATO Interpretative Decision

ATO ID 2003/674

Income Tax

Interest expense: Capital protected products without a separately identifiable put option entered into before 16 April 2003
FOI status: may be released

CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Where an investor enters into a capital protected product before 16 April 2003 and that product does not contain a separately identifiable put option, is all the interest expense incurred on the capital protected product deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. All the interest paid on such a capital protected product is deductible.

Facts

An investor acquires a capital protected product before 16 April 2003. Under the terms of the capital protected product the investor obtains a limited recourse loan to acquire a portfolio of shares and units that are listed on the Australian Stock Exchange. The investor acquires the shares and units for the purposes of deriving future dividend income and trust distributions.

Under the terms of the limited recourse loan, the lender's recourse against the investor in respect of the principal on the loan is limited to the amount which the lender can obtain by enforcing its rights in respect of the shares and units purchased under the capital protected loan arrangement.

The cost of this capital protection feature is reflected in the rate of interest charged on the loan made available under the capital protected product.

Reasons for Decision

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 the outgoings are of a capital, private or domestic nature.

In Commissioner of Taxation v. Firth (2002) 120 FCR 450; 2002 ATC 4346; (2002) 50 ATR 1 (Firth's Case), the Full Federal Court allowed the taxpayer a tax deduction for all the interest charged on a limited recourse loan. In Firth's Case the capital protection feature was integral to the loan and not distinct or severable from it.

On 16 April 2003 the Treasurer announced in Press Release No. 019 (Taxation of Capital Protected Products) that the ITAA 1997 would be amended to ensure that part of the expense on a capital protected product is attributed to the cost of the capital protection feature, is not interest and is not deductible where this cost is capital in nature, in respect of capital protected arrangements, including extensions to existing capital protected arrangements, entered into on or after 9.30am Canberra time 16 April 2003.

In this case, all the interest on the capital protected product is deductible as the capital protected arrangement is:

-
entered into before 16 April 2003
-
is not extended after that time; and
-
does not contain a separately identifiable capital protection component.

Date of decision:  24 June 2003

Year of income:  Year ending 30 June 2003

Legislative References:
Income Tax Assessment Act 1997
   section 8-1.

Case References:
Commissioner of Taxation v. Firth
   (2002) 120 FCR 450
   2002 ATC 4346
   (2002) 50 ATR 1

Other References:
Treasurer's Press Release No. 019 of 16 April 2003

Keywords
Acquisition of shares
Instalment warrants
Interest expenses
Non recourse loans

Siebel/TDMS Reference Number:  3671437

Business Line:  Public Groups and International

Date of publication:  1 August 2003

ISSN: 1445-2782