An Australian Taxation Office (ATO) product ruling on the taxation treatment of the Instreet Masti Deferred Purchase Agreement (DPA) range has brought clarity to the market and could boost activity around DPAs, which are a popular structured product wrapper in Australia.
Fixed coupons and any final coupon received by investors in units of any Instreet Masti product will be considered tax-deductible income “according to ordinary concepts and assessable income of the investor in the income year in which the coupon(s) are credited or received,”, the ATO has ruled.
Product Ruling 2015/1 over the Instreet Masti DPA resolves an issue that has “shadowed” the industry for many years, said George Lucas, managing director at structured product boutique Instreet Investments. “As investment in DPAs can be financially deductible against taxable income it provides a wider entrance for investors and boosts their confidence in subscribing,” said Lucas, adding that the ATO decision puts DPAs on a level footing with other commonly held portfolio investments.
The ruling not only confirms the tax effectiveness of the Instreet Masti DPA but, more significantly, gives financial advisers and their clients who choose to invest in this product the certainty they are entitled to with regard to the tax treatment of DPAs, said Lucas.
The Masti series was not developed with a certain tax outcome top of mind, said Lucas. “There have always been commercial motivations associated with an investment in Masti, and now with the addition of this ruling confirming the tax effectiveness I’m confident its place in investment portfolios will continue to grow,” he said in a statement following the ruling. “The Masti products have been developed as one investment option in a diversified portfolio that gives an investor the opportunity to access an equity market over a three-year time frame with minimal upfront capital.”
DPAs are a widely used wrapper for retail structured products in the Australian market structured as securities and as such can provide certain tax efficiencies. They usually have a three-year investment term and offer full capital protection.
The benefits offered by DPAs include competitive financing, the capacity to walk away from the investment without penalties, a fixed coupon in years one and two, uncapped returns and limited currency exposure, said Lucas. “Investors prefer simple structures,” he said. “DPAs with a call option are common in the market,” he said. “Investors tend to invest in shares they have heard of, thus local shares have [generally more] traction.”
There were 46 DPAs issued in Australia last year from Citi (14), Instreet (19), Sequoia Specialist Investment (6) and UBS (7), according to the SRP database. Year to date, 15 DPAs have been marketed – Instreet has issued three, while UBS has brought 12 DPAs to market.
Related stories:
Sophisticated Access launches online registry
UBS releases geared ‘borrow-to-invest’ structure for Aussie SMSF investors
Instreet: Improved investor confidence and risk appetite to drive SP market recovery