Under a typical capital protected borrowing arrangement, the investor uses borrowed funds to buy listed shares but is protected from a fall in their price by a capital protection feature. The benchmark interest rate is used to determine how much of the interest on the borrowing is attributable to the cost of this capital protection.
The new benchmark interest rate will be the Reserve Bank of Australia’s indicator variable rate for standard housing loans. Interest expense on a capital protected borrowing in excess of this level will be treated as the cost of capital protection and not deductible if on capital account. The current law will continue to apply to existing arrangements for 5 years or the life of the product, whichever is the shorter.
For a copy of the Treasurer's press release, No 2008/51, 13 May 2008, go here