Edited version of private advice

Authorisation Number: 1052325904294

Date of advice: 19 November 2024

Ruling

Subject: Derivation of income

Question

Will the entry into the Collar Loan Facility (CLF) result in the derivation of assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) or CGT event A1 under section 104-10 of the ITAA 1997 happening because PubCo shares form part of the security for the CLF?

Answer

No.

This private ruling applies to the following period:

1 July 2024 to 30 June 2025

Relevant facts and circumstances

X is the head company of a tax consolidated group and an Australian tax resident.

X holds shares in PubCo and is in negotiations with the third-party bank to enter into a Collar Loan Facility (CLF).

The CLF comprises a loan and put/call options and is a cash settled arrangement with a three-year maturity. The payout profile associated with the put and call options will be settled between X and the third-party bank along with the repayment of the loan.

The indicative terms for the proposed transaction are:

Table 1: The indicative terms for the proposed transaction are:

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 104-10

Reasons for decision

Question

Will the entry into the Collar Loan Facility (CLF) result in the derivation of assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) or CGT event A1 under section 104-10 of the ITAA 1997 happening because PubCo shares form part of the security for the CLF?

Summary

The CLF to be entered into do not result in the derivation of ordinary or statutory income.

Ordinary Income

Subsection 6-5(1) of the ITAA 1997 provides that an entity's assessable income includes income according to ordinary concepts, called ordinary income.

There is no definition of 'ordinary income' in the income tax legislation. However, a substantial body of case law has evolved to identify various factors that indicate whether an amount is income according to ordinary concepts. If a receipt is to be treated as income or not requires a consideration of the ordinary characteristics and quality of receipts treated as income.

In FC of T v Myer Emporium 87 ATC 4363 (Myer), the Full High Court considered that the key features of income include periodicity, recurrence and regularity. A single or isolated transaction may still also be considered to have the character of income. Although, these features are not necessarily decisive as per the case FC of T v Dixon (1952) 86 CLR 540, 567 - 568.

In Myer, the fact that a profit or gain was derived in the course of the taxpayer's business was said to be of 'telling significance'.

Capital gains tax

The basic capital gains tax (CGT) provisions are contained in Part 3-1 of the ITAA 1997. These provisions include in your assessable income any capital gains made when CGT events happen to CGT assets that you own (to the extent that they are not reduced by capital losses).

A CGT asset is any kind of property or a legal or equitable right that is not property. CGT event A1 under section 104-10 happens if you dispose of a CGT asset. You make a capital gain if your capital proceeds exceed the CGT asset's cost base.

Application to your situation

A loan is advanced by the third-party bank with the security for the loan being shares in PubCo. Further details on the transaction are in the facts.

Applying the key features of income identified in the Myer case, entering into the CLF will not result in any derivation of income under section 6-5 of the ITAA 1997. There is no income, profit or gain made.

The PubCo shares are not disposed of, nor any proceeds received as explained in the transaction details. The shares are merely provided as security for the CLF. Therefore, there is no realisation of a capital asset (PubCo shares) that occurs on entering into the CLF and CGT event A1 does not happen.

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidance rule for income tax'.