Issue
Is a loan agreement, where the repayment of the principal and any potential return on the principal is based on the sale value of trees at the time of harvest, a qualifying security under subsection 159GP(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?
Decision
No. The loan is not a qualifying security under subsection 159GP(1) of the ITAA 1936 as the eligible return on the security cannot be determined at the time the loan was issued.
Facts
The taxpayer entered into an agreement with a Government Authority for that authority to plant and maintain a tree plantation on third party land. Under the agreement, all costs associated with the plantation are to be borne by the taxpayer and all income resulting from the harvest belongs to the taxpayer.
The taxpayer then entered into an agreement with an unrelated party who would fund the plantation expenses and be entitled to receive all the income resulting from the harvest. Under another agreement the taxpayer provided a loan to that party to meet 50% of the plantation expenses. In return, the taxpayer receives 60% of the harvest revenue which is applied to reduce the loan and any excess is deemed, under the agreement, to be interest on the loan.
Reasons for Decision
Subsection 159GP(1) of the ITAA 1936 requires, among other things, that a security must have an eligible return for it to be a qualifying security. Under subsection 159GP(3) of the ITAA 1936, a security has an eligible return where, at the time of issue, it is reasonably likely that the sum of the payments (other than periodic interest payments) to an investor under the security will exceed the issue price of the security. In effect, the eligible return is the amount of the excess.
As the return on the loan is subject to the profitability of the harvest at a future date it cannot be determined at the time the loan is issued that it is reasonably likely there will be an eligible return. Accordingly, the loan is not a qualifying security for the purposes of Division 16E of Part III of the ITAA 1936.
Amendment History
Date of Amendment Part Comment 26 May 2017 Legislative references References to subsection 159GQ(2) and subsection 159GQ(3) have been removed as they are not quoted in this ATO ID
Date of Amendment | Part | Comment
26 May 2017 | Legislative references | References to subsection 159GQ(2) and subsection 159GQ(3) have been removed as they are not quoted in this ATO ID