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Taxation of capital protected products.



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C046/03

30 May 2003

Taxation of Capital Protected Products

Interim measures to enable the market in capital protected products to continue operating were announced today by the Minister for Revenue and Assistant Treasurer, Senator Helen Coonan.

The Federal Treasurer announced on 16 April 2003 that the Income Tax Assessment Act 1997 would be amended to ensure that part of the expense on a capital protected product is attributed to the cost of its capital protection component, is not interest, and is not deductible where this cost is capital in nature.

"For capital protected product arrangements, including extensions of existing arrangements, entered into on or after 9.30 am AEST on 16 April 2003, the Government has decided that an interim approach will be used to apportion the expense on such products" Senator Coonan said.

Details of the interim approach to be used to apportion the expense on a capital protected product between the interest on the loan component and the cost of the capital protection component are now publicly available (see Attachment A).

The interim approach details how to apportion the expense on capital protected products including those traded on the Australian Stock Exchange (ASX).

"This approach is consistent with the approach taken by the Australian Taxation Office in product rulings issued prior to 5 November 2002 for capital protected products with a separately identifiable put option," Senator Coonan said

It was on 5 November 2002 that the High Court refused to allow special leave for the Commissioner of Taxation to appeal the decision of the Full Federal Court in Firth v Commissioner of Taxation.

Senator Coonan said the Government was inviting submissions on the methodology to apply over the long term.

This could be the now released interim approach or a new methodology.

Submissions can be made to: Manager, Taxation of Financial Arrangements and Leasing, The Treasury, Langton Crescent, Parkes, ACT 2600 (tofa&leasing@treasury.gov.au) by Monday 14 July 2003.

ATTACHMENT A

INTERIM APPROACH

The methodology to be used to apportion the expense on a capital protected product between interest on the loan component and the cost of the capital protection component (or the put option) is set out below:

● Capital protected products (ie. instalment warrants) traded on the Australian Stock Exchange

(ASX). ❍ In the case of a purchase in the primary market, the cost of the capital protection

component is the amount that is paid for the put option.

In the case of a purchase on the secondary market:

❍ if the market value of the underlying security at the time of purchase is

greater than the loan amount, the amount attributed to the cost of the capital protection component is the price of the instalment warrant plus the loan amount less the sum of the market value of the underlying security and the interest prepaid on the newly acquired loan; or ❍ if the market value of the underlying security at the time of purchase is less

than the loan amount, the amount attributed to the cost of the capital protection component is the price of the instalment warrant plus the loan amount less the sum of the loan amount and the interest prepaid on the newly acquired loan.

● Other capital protected products.

❍ The amount of interest available for deduction is the lower of:

❍ the amount determined by reference to the Reserve Bank of Australia's

Indicator Rate for Personal Unsecured Loans - Fixed or Variable Rate whichever is applicable; and ❍ the amount determined by reference to the following specified percentage

amounts of the expense on a capital protected product: 60% for a product with term of one year; 72.5% for a product with a term of two years; 80% for a product with a term of three years; 82.5% for a product with a term of four years; and 85% for a product with a term of five years.

❍ The amount attributed to the cost of the capital protection component is the difference

between the expense on the capital protected product and the amount of deductible interest.

© Commonwealth of Australia 2000