Instalment Warrant interest deductibility threaten

Part of the Ralph tax reforms announced last year were to introduce tax avoidance measures aimed at hobby farms and obscure agricultural schemes. Specifically targeted, were schemes in which large upfront tax deductions were achieved sometimes years before any income was generated.

As reported in the Australian Financial Review (19/5/2000), Tony Tumble, head of treasury and finance at PricewaterhouseCoopers, claims that the measures announced by the government last year specifically excluded geared share and property investments, however, the bill has been drafted in such a way that there may be negative consequences for ASX listed instalment warrants. Instalment warrants allow an investor to pay for a share in two instalments while enjoying full exposure to the underlying share. The investor effectively borrows the second instalment until it is due, while the interest on the borrowing has in the past been treated as deductible.

To the extent that instalment warrants represent an interest in a share and interest costs can exceed dividend income in any financial year they are exposed under the current drafting of the bill. Interest deductibility is one of the key attractions of instalment warrants for private investors and has underpinned the growth in this sector of the warrant market. Failure by the government to clarify its stance could threaten the continued growth of instalment warrants.