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ATO view on capital protected products



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MEDIA RELEASE

Nat 99/26

ATO VIEW ON CAPITAL PROTECTED PRODUCTS

The Tax Office will disallow a proportion of tax deductions for interest claimed by taxpayers w ho use capital protected equity loan products to purchase shares, Tax Commissioner Michael Carmody said today.

As reported in the media these products have been under review by theT ax Office for some time.

“The Tax Office's view is that a part of the ‘interest* charged in these products is a capital protection fee and is not deductible under the general deduction provisions. The purpose o f this fee is to give the taxpayer capital protection in the event of a share price fall,’* Tax Commissioner M ichael Carmody said.

“In these products, the amount of the ‘interest* charged is above the normal personal loan rates by up to 25 per cent. This is because the"4interest’ charge involves two components: the cost for the use of the bank’s money, and the capital protection fee.

‘T he interest cost for the use of the bank's money to buy shares is fully deductible because it is a direct cost incurred in producing the expected dividend income.

The capital protection fee ensures that the borrower is protected from liability to repay the principal if the market value of the shares falls below their original purchase price.

In effect, the agreements provide that thebank is required to take the "shares as full satisfaction of the " debt if they have fallen in value below the amount borrowed. This fee compensates the bank, for limiting its right to the repayment of the borrowed money.

“It is our view that the capital protection fee is not deductible because it is incurred for a purpose other than to service or maintain the borrowed funds. It loses its character as a deductible cost of producing the expected income. -

“Our position is backed by the judgment of the High Court in S te e le ’ s case (99 ATC 4242).

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“The balance of the interest remaining would continue to be fully deductible. Taxpayers should only claim deductions equal to the amount of interest-charged on a benchmark normal personal loan rate where the bank does not restrict its rights as against the borrower.

“Taxpayers who have lodged returns claiming the higher amount of interest can come forw ard before 31 July 1999 and receive reduced penalties in accordance with our normal policy," Mr Carmody said.

The ΑΤΟ view is available on the A TO 's Internet site, ATG assist (www.ato.gov.au) under ‘W hat's New’. Benchmark indicative interest raterforcalculation purposes will be available’soon on ' " " ATOnssist. Taxpayers needing more information can also call the special helpline on-T3Q0 650 135.

CANBERRA 23 June 1999

Further information: Corporate Affairs and Marketing (02)6216 1901 or 0411 182 433

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