Volumes in the AUD1 billion (USD655 million) capital protected loan business have plummeted by 35-50% in recent weeks after the government announced a proposed change to the accounting of embedded derivatives. Last month the Commonwealth Treasury of Australia said it plans to amend the tax treatment of capital protected products to include the cost of the capital, typically an embedded over-the-counter put, to be treated under capital gains tax rather than accounted as an interest component that had been tax deductible. Legislation to spell out the changes is pending but in the meantime, no clarification has been released by the government to outline specific measures.
"The press release created more questions than answers," said Greg MacKay, head of equity derivatives at Macquarie Bank in Sydney. Market officials said that due to the vagueness of the release, customers have been on the sidelines until the government clarifies its stance. Traditionally, this is the busiest time of the year for such products as investors look to plunge in and write off interest expenses before the fiscal year-end in June. "We've seen a significant reduction in volumes from what we would normally expect this time of the year," said Mackay.
Aaron Stambulich, equity derivatives sales and trading at ABN AMRO in Sydney, said interest deductibles for the products will probably be reduced by around 10% for investors, but no one is sure what the exact measures will be. "They moved the goal posts without setting them down again," said Stambulich.
Banks as well as trade organizations have been speaking with the treasury in this regard. "Our focus is to get clarity in the short term," said David Lynch, head of policy at the International Banks and Securities Association of Australia in Sydney, noting that the organization is lobbying the regulators to provide guidelines while it awaits the new legislation that could be months in the making. Robert Jeremenko, advisor in the treasurer's office in Melbourne, declined comment.
