Overview
A financial institution or other entity markets an arrangement to taxpayers who are retail or wholesale investors. 2. A taxpayer enters into the arrangement. 3. Once the taxpayer pays the issue price, a parcel of ASX listed securities (the Parcel) is acquired and the legal title to that parcel is held by a custodian or security trustee, or under a similar trust arrangement, on behalf of the taxpayer. 4. The taxpayer also enters into a derivative instrument with the following features: i. The amount of the distributions or other income generated by the Parcel is either diverted by the taxpayer, or the trustee of the trust, to the entity with which the taxpayer, or some other entity acting on their behalf, has entered into the derivative instrument; ii. Under the derivative, the taxpayer may be entitled to a periodic coupon which is calculated by reference to the increase in value of a notional investment in certain reference assets. If the value of those reference assets does not increase during the calculation period, then no coupon will be payable for that period. These reference assets are unrelated to the Parcel. iii. Instead of or in addition to the payment of a periodic coupon, the taxpayer may be entitled to an amount that is payable at the maturity of the investment. This amount may be calculated by reference to the difference between the market value of the Parcel at maturity and the value of a notional investment in a separate portfolio of reference assets. This feature changes the taxpayer's exposure from an exposure to movements in the market price of the securities comprising the Parcel to an exposure to the reference assets. 5. The arrangement may also involve entry into put and call options over the securities comprising the Parcel or other securities that provide the same return as the notional investment. Such options may provide the mechanism to allow the taxpayer or the issuer to exit the arrangement prior to, or at maturity or to protect the invested capital of the taxpayer if they hold their investment to maturity. 6. The taxpayer may be able to exit the investment prior to maturity. However, if this occurs the taxpayer may not receive the benefit of the capital protection mechanism described above in paragraph 5. 7. The taxpayer may also be provided with a loan to fund the investment and, as a result, may incur interest and/or borrowing expenses. 8. In some cases, the entity who marketed the arrangement or an associate who implements the arrangement indicates in marketing documents that certain favourable tax outcomes are available or potentially available to investors, such as: i. franking credits; ii. deductions for payments made by the taxpayer under the derivative; and/or iii. deductions for interest expenses or borrowing costs. 9. The issuer, a custodian or some other entity acting on their behalf issues distribution statements or other documents that reflect favourable tax outcomes for the taxpayer, such as: i. tax offsets in respect of distributions constructively received, but paid to the counterparty under the derivative; ii. revenue deductions for payments made by the taxpayer under the derivative; and iii. deductions for interest or borrowing costs. 10. The taxpayer subsequently claims some or all of the favourable tax outcomes discussed at paragraph 9 in their income tax return. 11. In some cases, there may be differences in implementation of key steps in the arrangement that may affect the potential availability of these favourable tax outcomes, such as failures to transfer the interest in the Parcel or to execute key transactions within the derivative.