As part of its commitment to ensuring the tax system is as fair and efficient as possible, the Government will amend the rules dealing with the taxation of capital protected borrowings. This amendment will apply to capital protected borrowing arrangements entered into after 7.30 pm (AEST) on 13 May 2008.
A typical capital protected borrowing 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 by a capital protection feature. This feature gives the investor the right to transfer the shares back to the lender for the amount outstanding on the loan if the value of the shares falls below that amount.
The benchmark interest rate in the capital protected borrowing rules will be changed to the Reserve Bank of Australia's indicator variable rate for standard housing loans. Interest expense on a capital protected borrowing in excess of this level will be treated as the cost of capital protection and not deductible if on capital account.
The amendment will provide a more appropriate basis for apportioning the expense in capital protected borrowings between interest on a borrowing without capital protection and the cost of capital protection.
The current law, which applies the Reserve Bank of Australia's indicator variable rate for personal unsecured loans to determine the cost of capital protection, will continue to apply to existing capital protected borrowing arrangements for a period of five years or the life of the product, whichever is the shorter.
Australian taxpayers are entitled to a tax system that is as fair and efficient as possible and this measure will help achieve that goal. This measure has ongoing gain to revenue estimated to be $70 million over the forward estimates period. The measure is another demonstration of the Government's commitment to finding savings in the Budget to help tackle inflationary pressures.