Tax ruling offers 'nirvana'

The ruling for the controversial Macquarie Flexi 100 product gives investors certainty about claiming interest deductions on pre-paid interest up to a benchmark rate.

The structure of the "limited recourse" loan for 100 per cent of the investment means investors do not put their own money at risk.

They only pay for product fees and interest pre-payments, which are largely tax deductible, avoiding the trap of significant capital losses that occurred in tax-driven investments like Timbercorp and Great Southern.

The nature of the loan within the Macquarie product and others offered by UBS and Royal Bank of Scotland (RBS) has been challenged amid concerns the non-repayable loan is a "round-robin" device primarily structured for the tax benefit.

The Tax Office has identified that it does not like "round-robin" financing structures, limited recourse loans, bringing forward deductions for financing costs, and artificial reductions in risk exposure.

Despite the Macquarie Flexi 100 arguably containing those features, the Tax Office ruled on Wednesday in favour of the tax deductions.

A previous critic of the Macquarie Flexi 100, Tony Rumble, the founder of the structured product manufacturer Alpha Structured Investments, said the ruling was a "game changer". "Essentially the [Tax Office] has been very against people claiming tax deductions using round robin structures and also where there is no certainty to income being generated."

However, he said the ruling now confirmed tax deductibility for interest payments for Macquarie Flexi 100 with a limited recourse loan.

Justin Beeton, the managing director of JB Global, seized on the potential tax advantages for similar products he markets, writing to BusinessDay: "These investments are now the nirvana many investors have been searching for."

JB Global manufactures a white label RBS product based on shares of Berkshire Hathaway, which it has previously marketed as "the ultimate Warren Buffett investment".