On Wed 11.7.2018, the ATO released Product Ruling PR 2018/7 on the tax consequences of investing in PTrackERS, being exchangeable notes offered by PM Capital GO 2025 Limited. In particular, PR 2018/7 provides that security holders have a non-share equity interest in the company and that various anti-avoidance rules do not apply.
DATE OF EFFECT: from 11 July 2018.
Extracts from the Ruling
3. In this Product Ruling, the scheme is an investment in exchangeable notes called Portfolio Tracking Exchangeable Redeemable Securities (Converting Security), (PTrackERS),which are offered under the Prospectus by PM Capital GO 2025 Limited (the Company), a newly incorporated company which is a wholly owned Australian subsidiary of PM Capital Global Opportunities Fund Limited (the Parent Company).
16. Subject to paragraph 4 of this Product Ruling and the assumptions in paragraph 45 of this Ruling:
- (a) The Securityholder’s interest in the Company (being the PTrackERS) is a non-share equity interest (as defined in subsection 995-1(1)).
- (b) The scheme as described in paragraphs 18 to 44 of this Product Ruling gives rise to the Securityholders having an equity interest in the Company for the purpose of Division 974.
- (c) A Distribution not paid out of Taxable Profits is a non-share capital return as defined in section 974-125, to the extent to which it is not a non-share dividend as defined in section 974-120.
- (d) A Distribution received by the Securityholder, which is not paid out of Taxable Profits, is not assessable and is a recoupment and will not form part of any element of the cost base (or reduced cost base) of the PTrackERS under subsections 110-45(3) and 110-55(6). This effectively means that the part of the Issue Price returned to the Securityholder by way of this Distribution is taken to have never formed part of the cost base (or reduced cost base) of the PTrackERS.
- (e) Distributions paid out of Taxable Profits which are non-share dividends under section 974-120 are included as assessable income of the Securityholder under section 44 of the Income Tax Assessment Act 1936(ITAA 1936).
- (f) The Securityholder will include in their assessable income an amount equal to the franking credits attached to the franked distribution as per subsection 207-20(1).
- (g) The Securityholder will be entitled to a tax offset equal to the franking credit received on Distributions paid in respect of the PTrackERS under subsection 207-20(2), where the Securityholder is a qualified person for the purposes of former Division 1A of Part IIIAA of the ITAA 1936 in respect of a franked distribution.
- (h) Securityholders who are entitled to a tax offset under subsection 207-20(2), in respect of the franking credits received in relation to the PTrackERS, will be subject to the refundable tax offset rules in Division 67, unless they are specifically excluded under section 67-25.
- (i) The Distributions paid in respect of the PTrackERS are not part of a dividend stripping operation under section 207-155 of the ITAA 1997.
- (j) The Commissioner will not make a determination under paragraph 204-30(3)(c) to deny the whole, or any part, of the imputation benefits received by a Securityholder in relation to the Distributions paid in respect of the PTrackERS.
- (k) PTrackERS are not considered to have sufficient debt like obligations to be contracts to which the definition of security under paragraph 159GP(1)(d) of the ITAA 1936 applies, nor do they fall within paragraphs (a), (b) or (c) of that definition.
- (l) For the purpose of section 26BB and section 70B of the ITAA 1936, the PTrackERS are not considered to be traditional securities.
- (m) PTrackERS held by the investor are CGT assets under subsection 108-5(1). Each PTrackERS is a convertible interest.
- (n) CGT event C2 (section 104-25 of the ITAA 1997) will happen for Securityholders on redemption of the PTrackERS.
- (o) CGT event C2 (section 104-25 of the ITAA 1997) will happen for Securityholders on Exchange of the PTrackERS for Shares. However any capital gain or capital loss made by a Securityholder from CGT event C2 happening on Exchange of the PTrackERS will be disregarded (subsection 130-60(3) of the ITAA 1997).
- (p) The cost base or reduced cost base of the Parent Company shares acquired by a Securityholder should include the Issue Price (subsection 130-60(1) of the ITAA 1997).
- (q) The Securityholder will be taken to have acquired the Shares when the Exchange happens (subsection 130-60(2)) of the ITAA 1997).
- (r) Section 45 of the ITAA 1936 will not apply to treat the Shares issued on Exchange as an unfrankable dividend paid by the Parent Company.
- (s) The Commissioner will not make a determination under subsection 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 applies to treat the whole, or any part, of a capital benefit that arises on Exchange or Redemption of the PTrackERS as an unfranked dividend in the hands of Securityholders.
- (t) The Commissioner will not make a determination under subsection 45B(3)(b) of the ITAA 1936 that section 45C of the ITAA 1936 applies to treat the whole, or any part, of a capital benefit that arises on Exchange or Redemption of the PTrackERS as an unfranked dividend in the hands of Securityholders.
17. Provided the scheme ruled on is entered into and carried out as described in this Product Ruling, the anti-avoidance provisions in Part IVA of the ITAA 1936 will not apply to the Securityholder. The Commissioner will therefore not make a determination under paragraph 177EA(5)(b) of the ITAA 1936 to deny any imputation benefits referred to in paragraphs 80 to 83 of this Product Ruling which arises in respect of a franked distribution that flows directly or indirectly to the Securityholder.
[LTN 131, 11/7/18; Tax Month – July 2018]