Income Tax Act 2007 section 597

Deemed interest: cash collateral under stock lending arrangements

Section 597 is a targeted anti-avoidance rule that deems interest to arise to the borrower on cash collateral provided under certain stock lending arrangements.

• Where securities are lent under a stock lending arrangement and the borrower provides cash collateral, any return paid on that collateral may be treated as interest for tax purposes.
• This rule targets arrangements where the economic substance of the cash collateral resembles a loan, ensuring that the return on it is taxed as interest rather than escaping the tax net.
• The deemed interest treatment applies regardless of how the parties have labelled or structured the payments on the collateral.
• The provision acts as an anti-avoidance measure, preventing taxpayers from using stock lending structures to convert what is effectively interest income into a non-taxable or differently taxed form of return.