Costello Ends Tax Break On Capital Protected Loans

by Mary Swire, Tax-News.com, Hong Kong

29 April 2003

The Australian government is introducing legislation that will reduce the tax benefits on capital protected loans, a product used by investors to limit their risk on listed shares, units and stapled securities.

The change will mean the cost of protection, which in most cases is roughly equal to 20% of total interest, will no longer be deductible for tax purposes on any investments purchased after April 16 using a capital protected loan.

Defending the government's decision, Finance Minister Paul Costello stressed that the reform was an "integrity measure directed at protecting the revenue base". The Herald Sun newspaper quoted the Finance Minister as explaining that: "the Government has decided to amend the law to ensure part of the expense on a capital protected product is attributed to the cost of the capital protection feature, is not interest and is not deductible."

Many observers feel that the change in the law is a response to the High Court's decision not to grant an appeal to the ATO (Australian Tax Office) in its case against Stephen Frith, who successfully claimed $1.2 million in tax deductions against $7 million in protected loans.

Capital protected products had become extremely popular, particularly amongst high earning professionals. One of the largest providers, Macquarie Bank, however, announced that it believes that the impact of the changes will be slight as it has already modified six of its highly geared warrant products in the light of the new rules.

The small number of products which are affected by the change contrasts markedly with the 200 or so instalment warrants the bank still operates under the old rules, according to division director in equity markets, Jeff Weedon.

"From a business perspective, there was not a whole lot of products with a tax bias," Weedon confirmed to the Herald Sun.

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