Deferred Purchase Agreements (DPAs)

[Dezza]

Hi all,

Was wondering if those with more knowledge/experience could provide more information regarding these structured investments?

CommSec is currently offering a new Capital Series Access China https://www.comsec.com.au/invest/CurrentOffers.aspx and after reading the PDS, looked kind of interesting. Upside of the HSCEI with capital guarantee. if held to maturity. HSCEI is up 750% over 7 years.

I'm confused as to the tax position/deductibility of interest if one was to gear into it? If it doesn't generate income/dividends over the 5 years, is the interest deductible over the term if you decide to take delivery of the assets (at the moment BHP shares) at the end of the term? It would be similar to purchasing shares with a margin loan that don't pay dividends in the first 5 years, you'd still be able to claim the deductions on it.

Anyways, I'm not spruiking the product, just after some more info and your opinions, especially if you have invested in previous Capital Series products.

Cheers.

 

[Hyperion]

Hi Dezza,

Firstly, if you havent already done so, take a look at the tax opinion by greenwood & freehills in relation to this product.

Unfortunately, as you will see when reading their opinion, the application of tax laws in relation to DPAs is still uncertain.

Subject to certain assumptions dependent on your individual circumstances, I would be of the opinion that the interest on the Capital Investment Loan is NOT deductible under s8-1 as no assessable income can reasonably be expected to be derived from the investment during the period of the loan. Rather, the interest may possibly be included in the tax cost base of the delivery asset upon maturity.

The above is my personal opinion only, and is not to be construed as taxation advice. Please seek advice from a qualified tax professional.

Hyperion

 

[Dezza]

Thanks Hyperion. I read the tax opinion and that's when the questions came up. But yeah, I'll be sure to check it out with an accountant next week.

So how does this differ to a margin loan interest being deductible on share purchases that do not provide dividend income? Is it because the product specifcally states that no income will be derived over the timeframe, in comparison to shares where there is always the potential to pay an income? My tax knowledge isn't very strong.

 

[Hyperion]

With all respect, your accountant will likely have no idea. If even greenwood & freehills are unsure, and with the law as uncertain as it is with respect to DPAs, your accountant will likely just take a guess and hope the tax office don't audit you.

If you take out a margin loan to purchase shares which do not provide dividend income (or other assessable income) - the interest is NOT deductible. Rather it is added to the cost base of the shares (the 3rd element of cost base).

(Again, personal opinion only, not tax advice)

Hyperion

 

[Dezza]

I'm sure my Accountant won't take offense...he's dodgy enough already.

But thanks for your help and feedback. Learning things already...