Edited version of private advice

Authorisation Number: 1051967285960

Date of advice: 11 April 2022

Ruling

Subject: Investment income and deductions

Question one

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 two

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 three

Are the imputation credits arising from the dividends assessable income 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 four

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 five

Subject to compliance with Division 247 of the ITAA 1997, is the interest on the Loan charged to you by LEL deductible under paragraph 8-1(1)(a) of the ITAA 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 six

Are you eligible 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. You are entitled to a tax offset under Division 207 and, as none of the exceptions under section 67-25 apply, you will also be subject to the refundable tax offset rules in Division 67.

This ruling applies for the following periods:

Year ended 30 June 2021

Year ended 30 June 2022

Year ending 30 June 2023

Year ending 30 June 2024

Year ending 30 June 2025

Year ending 30 June 2026

Year ending 30 June 2027

Year ending 30 June 2028

The scheme commences on:

21 June 2021

Relevant facts and circumstances

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

You have a loan through a registered financial corporation with the Australian Prudential Regulatory Authority (the Lender). You acquired a loan from the Lender to purchase fully paid ordinary shares in a company. You elected to acquire an upside cap and a put option and are wholly or partially protected from a fall in the market value of the shares.

Your agreement with the Lender includes the following important terms:

•                    The Lender advanced loans to you for the sole purpose of purchasing shares in a specified company;

•                    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 loan is a full recourse loan;

•                    you are absolutely entitled to the shares as against the Trustee and on the Maturity Date or Early Maturity Date of each loan, you may elect to transfer the shares into your name;

•                    you are not entitled to elect to use a dividend reinvestment plan offered by a Company;

•                    you grant a security interest to the Lender over the shares and other entitlements and benefits relating to the shares purchased by you; and

•                    if there is a default by you under the agreement, the Lender may exercise comprehensive powers in relation to the shares.

The Trustee holds the shares for your sole benefit.

Within a reasonable period of time following receipt of each relevant case dividend paid by the 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