Budget - Capital Protected Borrowings

Here is a nice summary from the CBA re capital protected borrowings.
It is rather annoying as the previous Government changed it to be 100% tax deductible providing the rate was equal to or less than the RBA personal loan rate (14.55%pa).

The std housing rate does not take into account the risks associated with the markets compare dto bricks and mortar.

Hence if your capital protected product charges a rate of 10.35% then 1% of your interest will not be deductible.

This will be fun for accountants at tax time each year.


The Federal Budget and its impact on Capital Protected Borrowings
Last night the Federal Budget announced that rules regarding capital protected borrowings (CPB) will be amended for new CPB arrangements entered into after 13 May 2008. These rules will affect the Commonwealth Bank Protected Portfolio Loan (PPL) and Regular Instalment Warrant offerings.
A CPB generally consists of a loan to acquire listed shares with a limited recourse feature and put option to transfer shares back to the lender if the shares decline in value.
For tax purposes, the interest rate payable under such arrangements is split into two components:
1. a component that relates to the capital protection feature which is treated as a non-deductible CGT cost base amount; and
2. a deductible interest portion.

So what are the changes?
The benchmark rate used to determine this split is to be changed from the Reserve Bank of Australia’s indicator variable rate for personal unsecured loans (currently 14.55% p.a.) to the indicator variable rate for standard housing loans (currently 9.35% p.a.).
This change will reduce the amount that an investor in CPB style products can claim as an interest deduction by several percentage points, based on these current rates.

What are the impacts for existing holders?
Existing holders of a PPL or Instalment Warrants will not be affected by the changes. The changes apply only to those who enter into a CPB arrangement on or after 13 May 2008.
What does it mean for new investors?
Those considering an investment in a PPL or Instalment Warrant will be impacted under the new changes. These changes should be considered when making new investment decisions.
What’s next?
The upcoming Options and Lending (Opals) product, which you may have heard about, is currently being reviewed so that it creates the best outcome for investors in light of the new changes.
We will keep you posted on any further announcements made in regards to CPBs. In the meantime if you would like more information on the announced changes you can go to the website below:
Press Release - Capital Protected Borrowings [13/05/2008]

 

This is ludicrous !

I think they have got confused with the generous benchmark interest rate used for FBT - a topic they love to hate.

It is unrealistic to argue that a parcel of shares as security for a loan is as safe as a 1st mortgage over residential property.

It is clearly going to overstate the "premium" paid for capital protection.

Add to that the fact that any put option that goes "deep in the money" within 45 days of share acquisition could prevent you from claiming franking credits, this is just the icing on the cake.

It just shows the Government has a hatred of anybody with any capital whatsoever - except for a private residence (provided you don't use it as security for investment).

BUT it is trying to attract overseas capital by giving HUGE tax breaks (zero witholding).

Moral: only non-resident investors are welcome in Australia !!!

Cheers,

Rob

This is directly interfering with and skewing financial markets.

 

Hi Rob,

I met up with one of Perpetual BDMs this morning and I made exactly the same point!!!

They aren't too worried as there is only a small difference, if the rate was alot larger than the deductible rate it would make these products alot less attractive for investors.

Cheers,

Dan

PS Before making an investment decision speak to your FPA registered Financial Planner.

 

Hi Dan,

Maybe the commercial rate is much lower due to the better security of acquiring beneficial ownership of your shares for use in their on-lending business !!!!!!!!!!!!

Cheers,

Rob

 

That brings up another issue ...

Do margin lenders that participate in stock lending practices have to account for these using the Trading Stock provisions of the ITAA ?????

This is because they don't get exactly the same shares returned, the borrower enters the market to acquire replacement shares at the end of the period.

s.70-10 anything produced manufactures or acquired that is held for the purposes of manufacture, sale or EXCHANGE in the ordinary course of a business.

Cheers,

Rob