A tax lawyer from Greenwoods & Herbert Smith Freehills has queried whether the exposure draft legislation proposing to clarify the look-through tax treatment of instalment warrants and instalment receipts is really necessary.
The draft legislation, released on 19 January 2015, proposes to amend the ITAA 1997 to ensure that the tax consequences of ownership of an instalment trust asset flow to the entity that has the beneficial interest in the asset (instead of to the trustee). This means that the underlying investment assets would be deemed to be held directly by the investor (so that the trust is ignored for income tax purposes) and no CGT event would happen on payment of the final instalment. This look-through tax treatment would also apply to superannuation fund investments covered by a limited recourse borrowing arrangement (LRBA).
The long-standing industry practice for certain types of instalment warrants and receipts has been to ignore the trust and to treat the investor as the owner of the asset. However, as some of these products have become more complex, the draft legislation seeks to remove uncertainty and clarify this tax treatment.
Writing in Thomson Reuters Weekly Tax Bulletin Issue 6 (13 February 2015), Mr Tim Kyle, Director, Greenwoods & Herbert Smith Freehills, noted that the Tax Office became concerned around 2008 that investors in these arrangements may not be absolutely entitled to the underlying assets and CGT event E5 would arise if the investor became entitled to the asset. While the draft legislation is intended to overcome this absolute entitlement issue, Mr Kyle said that the Tax Office has never publicly expressed a concluded view on the issue. So it’s not clear that we need it at all, he said.
Moreover, if a legislative fix is required, Greenwoods & Herbert Smith Freehills considers that the draft legislation is a “Band Aid solution” as the absolute entitlement issue arises equally in any number of other fact patterns (eg custody and nominee arrangements). Nevertheless, it is understood that no adverse inferences are intended to be drawn about industry practice in relation to these other fact patterns.