Clarity on CGT treatment of instalment warrants and update on capital protected borrowings

Date of article: 2 August 2010
Last updated: 2 August 2010

Clarity on capital gains tax treatment of instalment warrants

The longstanding practice of capital gains tax treatment of instalment warrants is being legislated to provide certainty to taxpayers.

The Government, via Assistant Treasurer, Senator Nick Sherry, announced on 10 March 2010 that the Government will introduce legislation to confirm the practice of treating the investor of an instalment warrant over exchange traded securities as the owner of the listed securities for income tax purposes.

On the same day, the Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen announced that the Government will introduce legislation to treat the instalment arrangement with limited recourse borrowing under s 67(4A) of the SIS Act as the owner of the asset. This means that SMSF that have instalment arrangement with limited recourse borrowing arrangements will only trigger a CGT event on the disposal of the asset, not at the time of the last instalment payment.

The legislation will treat:

• the owner of an instalment warrant over an exchange traded security as the owner of the security; and
• a superannuation trustee who enters into a limited recourse borrowing arrangement for the purpose of purchasing an asset, as permitted under subsection 67(4A) of the SIS Act, as the owner of the asset.

Ref: Assistant Treasurer, Nick Sherry, press release 37/2010 (10 March 2010); Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen, press release 20/2010 (10 March 2010).

Change to deductibility benchmark interest rate on capital protected borrowings

The government will adjust the benchmark interest rate to better reflect the additional credit risk borne by lenders for the cost of capital protection that is paid on a deferred basis.

The lifting of the benchmark interest rate will allow borrowers a higher deduction for interest expense and smaller proportion allocated to capital protection, which is not deductible if on a capital account.

From 11 May 2010, the benchmark interest rate on capital protected borrowings is the Reserve Bank indicate rate for standard variable housing loans plus 100 basis point (instead of the Reserve Bank indicate rate for standard variable housing loans). This will apply to capital protected borrowings entered into after 7:30pm AEST 13 May 2008. Transition arrangement will also be available for capital protected borrowings entered into on or before 13 May 2008.

The adjustment to the benchmark interest rate has not been legislated and as such, is not in force. The Australian Taxation Office has stated that it will take no action for deductions up to the adjusted benchmark interest rate at this point in time.

Ref: Assistant Treasurer, Nick Sherry, press release 94/2010 (11 May 2010).

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