Edited version of private advice

Authorisation Number: 1052199104219

Date of advice: 30 November 2023

Ruling

Subject: Assessable income

Question 1

Are gains made by you on redemption of 60 month autocallable notes included in assessable income under subsection 26BB(2) of the ITAA 1936?

Answer

Yes.

Question 2

Are the gains made by you on redemption of the 60 month autocallable notes net capital gains included in assessable income under section 102-5 of the Income Tax Assessment Act 1997?

Answer

No.

This ruling applies for the following period:

Income year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You invested in autocallable note investments issued in June 20XX.

The "Structured note confirmation advice", issued to you on 30 June 20XX, from XX regarding the Autocallable notes confirms ** units were purchased at unit price of AUD **.

The autocallable notes are an Equity-linked investment and is linked to the performance of the Underlyings. A conditional Coupon @ XX% p.a. is payable only if an early redemption event occurs. If an early redemption event does occur, you will receive the higher of either the absolute return of the performance of the Worst performing Asset or the accumulated conditional Coupon amount. The investment is not principle protected. A Knock-In Event is deemed to have occurred if on the Final Valuation Date the Closing Price of the Worst Performing Underlying is less than its Knock-In Price (i.e. XX% of its Initial Price).

An Early Redemption Event is described as:

A quarterly observation starts from 12 months.

An Early Redemption Event occurs if the Closing Price of ALL Component Shares on the Observation Date are equal to or above their respective Knock-Out Prices. The Units will mature on an Early Redemption Date on the occurrence of an Early Redemption Event.

It also describes the outcome of a Knock-In Event as:

Note: at maturity, if a Knock-In Event occurs the investor will receive back an amount less than the original investment. Also, the conditional coupon will NOT be paid to client at maturity. For example if the closing price of the Worst Performing Underlying is 50% of its initial price then the investor will receive 50% of the initial investment.

The autocallable notes investment matured on XX and were redeemed on XX.

The "Structured note confirmation advice", issued to you on XX, from XX regarding the Autocallable notes confirms XX units were purchased at unit price of AUD XX.

Gains on the redemption of the autocallable notes investments have been treated as ordinary income and included as part of item 10 in your 20XX income tax return.

Relevant legislative provisions

Division 16E of the Income Tax Assessment Act 1936

subsection 26BB(2) of the Income Tax Assessment Act 1936

subsection 159GP(1) of the Income Tax Assessment Act 1936

subsection 159GP(3) of the Income Tax Assessment Act 1936

section 102-5 of the Income Tax Assessment Act 1997

subsection 118-20(1) of the Income Tax Assessment Act 1997

Does IVA apply to this private ruling?

No.

Reasons for decision

Question 1

Summary

The gains made by you on redemption of the autocallable notes are gains on traditional securities included in assessable income under subsection 26BB(2) of the ITAA 1936.

Detailed reasoning

All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.

A security is defined in subsection 159GP(1) of the ITAA 1936 to include:

...

(d) any other contract, whether or not in writing, under which a person is liable to pay an amount or amounts, whether or not the liability is secured.

Division 16E of the ITAA 1936 imposes a statutory accruals regime on certain payments in relation to a security that is a qualifying security.

To be a qualifying security as defined in subsection 159GP(1) of the ITAA 1936, the security must be issued after 16 December 1984, its expected term must exceed or be likely to exceed 12 months and the sum of all payments under the security, other than payments of "periodic interest", must exceed its issue price. This excess is called the eligible return of the security.

The definition of an eligible return is contained in subsection 159GP(3) of the ITAA 1936. This definition requires that at the time of issue of the security, it is reasonably likely for the sum of all payments under the security to exceed the issue price of the security, and the amount of the eligible return is the amount of the excess.

Where a security is not a qualifying security it may be a traditional security.

The definition of "traditional security" in section 26BB of the ITAA 1936 reads:

traditional security, in relation to a taxpayer, means a security held by the taxpayer that:

(a) is or was acquired by the taxpayer after 10 May 1989;

(b) either:

(i)      does not have an eligible return; or

(ii)     has an eligible return, where:

(A)  the precise amount of the eligible return is able to be ascertained at the time of issue of the security; and

(B)  that amount is not greater than 1 1/2% of the amount calculated in accordance with the formula:

Payments × Term

In accordance with section 26BB(2), where a traditional security of a taxpayer is redeemed, the amount of any gain on the redemption shall be included in the assessable income of the taxpayer of the year of income in which the redemption takes place.

Application in your circumstances

The autocallable notes are a security as defined in paragraph 159GP(1)(d) of the ITAA 1936, as they are a contract under which a person is liable to pay an amount or amounts, and in this case, the capital is not secured.

Applying your circumstances to the requirements of a qualifying security under Division 16E (subsection 159GP(1) of the ITAA 1936):

•         The autocallable notes were issued to you in June 20XX being after 16 December 1984.

•         The term of the autocallable notes was XX years, exceeding the 12 months required.

•         The autocallable notes did not have an eligible return.

The eligible return could not be established at the time the security was issued as the return was contingent on market forces. The characteristics above do not meet the criteria listed in Division 16E for the autocallable notes to be considered a qualifying security.

Although the autocallable notes are not qualifying securities, they meet the definition of a traditional security as; they were purchased by you in June 20XX, being after 10 May 1989, and they did not have an eligible return.

As they are a traditional security, the gains you made on the redemption of the autocallable notes will be included in your assessable income in the year the redemption took place in accordance with subsection 26BB(2) of the ITAA 1936.

Question 2

Summary

The gains made by you on redemption of the autocallable notes will not form part of net capital gains included in assessable income under section 102-5 of the ITAA 1997 as the capital gain from the redemption will be nil.

Detailed reasoning

All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.

Your assessable income includes your net capital gain (if any) for the income year, in accordance with subsection 102-5(1). Your net capital gain is your total capital gain less any capital losses and less any discount you are entitled to on your gains.

As stated in subsection 118-20(1), a capital gain you make from a CGT event is reduced if, because of the event, a provision of this Act (outside of Part 3-1) includes an amount (for any income year) in your assessable income.

Application in your circumstances

As the gain on the redemption of the autocallable notes is included in your assessable income under subsection 26BB(2) of the ITAA 1936, the capital gains amount from the redemption will be reduced to nil in accordance with subsection 118-20(1). As there is no capital gains amount, there will be no net capital gain included in your income under subsection 102-5(1) for this event.