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Taxation of capital protected products
Peter Costello Treasurer
TAXATION OF CAPITAL PROTECTED PRODUCTS
Today the Government is announcing a measure relating to the taxation treatment of the capital protection feature included in a capital protected product.
A typical capital protected product is a limited recourse loan facility to fund the purchase of listed shares. The investor is protected from a fall in the price of the shares as the loan facility includes a capital protection feature that gives the investor the right to transfer the shares back to the lender for the amount outstanding on the loan.
The Full Federal Court in Firth v Commissioner of Taxation ruled that the component of `interest' applicable to the cost of the capital protection feature is deductible when paid. On 5 November 2002, the High Court refused special leave for the Commissioner of Taxation to appeal this decision.
In response, the Government has decided to amend the Income Tax Assessment Act 1997 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.
Treating the cost of capital protection as separate and distinct from interest on a loan is consistent with the approach taken in product rulings issued by the Australian Taxation Office prior to the High Court's refusal to allow special leave.
The amendment applies to capital protected products that are used to acquire listed shares, units and stapled securities. The capital gains tax (CGT) provisions will ensure that the cost of capital protection is included in the cost base of the relevant asset for CGT purposes.
This amendment is an integrity measure directed at protecting the revenue base. The measure restores the general principle underpinning the current law that any revenue loss or outgoing in producing assessable income is deductible, while a capital loss or outgoing is not deductible.
The measure also ensures that all borrowers who utilise a capital protection feature are treated in the same way for taxation purposes whether or not the capital protection feature is purchased separately, or included within the `interest' on the loan.
The amendment takes effect immediately, that is, it applies to arrangements, including extensions of existing arrangements, entered into on or after 9.30 am Canberra time 16 April 2003.
Contact: David Alexander 02 6277 7340
16 April 2003