ATO ID 2011/96: Last-in first-out rule: meaning of related securities
Date of decision: 3 December 2010
Year of income: Year ended 30 June 2011
Business line: Private Groups and High Wealth Individuals

Issue
Do shares held by a connected company that fail the holding period rule from the perspective of the connected company constitute related securities for the purposes of the Last-In First-Out ('LIFO') rules in former section 160APHI of the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision
No. Such shares would not constitute related securities for the purposes of former subsection 160APHI(2) of the ITAA 1936.

Facts
Company A holds shares in Company X that entitled Company A to a dividend. Company A disposes of the shares in Company X after receipt of the dividend. Company A would be a qualified person in respect of the dividend received for the purposes of former Division 1A of the ITAA 1936. Company B also holds shares in Company X that entitled Company B to a dividend. Company B also disposes of the shares in Company X after receipt of the dividend. However, company B would not be a qualified person in respect of the dividend received for the purposes of former Division 1A of the ITAA 1936. Company A and B are both companies in the same wholly owned group in that they have the same ultimate holding company.

Reasons for decision
Summary: Former section 160APHI of the ITAA 1936 provides the legislative basis for the operation of a LIFO rule in determining the period for which shares are taken to have been held during a qualification period. In general terms, the provision provides for all shares held by a person (the primary securities) to be grouped together with substantially identical shares held by connected persons (the related securities) in determining the period of ownership, with disposals of shares from this group taken to be on a last-in first-out basis. The rationale for this treatment is provided at paragraph 4.39 of the Explanatory Memorandum to Taxation Laws Amendment Bill (No. 2) 1999 which provides as follows: 'LIFO prevents circumvention of the holding period rule by taxpayers with portfolios of old shares buying new shares and selling old shares, as well as providing tax neutrality in a decision whether to make economically equivalent disposals of particular parcels of shares.' However, the LIFO treatment does not extend to all shares. As is made clear at paragraph 4 .48 of the Explanatory Memorandum 'There will be no double counting of disposals of securities. Therefore, if the disposal of a security triggers the holding period rule in relation to that security, it will not also trigger a disposal of another security, even if it is related.' For the shares in Company X held by Company A, the restriction on double counting is achieved by former subsection 160APHI(7) of the ITAA 1936. This provides that the LIFO rule would not apply to disposals of shares by Company A in circumstances where company A would not be regarded as a qualified person in respect of the shares by failing the holding period rule. However, from the perspective of Company A, it is also necessary to consider shares held by connected persons to see if these shares are also subject to the LIFO rules which could potentially alter the period for which Company A is considered to have held its Company X shares. In order for the LIFO treatment to extend to the Company X shares held by Company B, it would be necessary for such shares to be related securities for the purposes of former subsection 160APHI(2) of the ITAA 1936. Where the connected person holding a substantially identical security is a company, one of the requirements for the substantially identical security to be regarded as a related security is that the substantially identical security gives rise to a 'rebateable dividend'. The term 'rebateable dividend' is defined for these purposes in former section 160APHD of the ITAA 1936 as a dividend for which the taxpayer is entitled to a rebate under section 46 or section 46A. Further, former subsection 46(2B) of the ITAA 1936 provides that a shareholder is not entitled to a rebate pursuant to former section 46 unless the shareholder is a qualified person in respect of the dividend. As Company B is not a qualified person in respect of the dividend it receives from Company X, the shares in Company X it holds would not be related securities for the purposes of former section 160APHI of the ITAA 1936. As such, they would not be included in the group of securities subject to the LIFO rule from the perspective of Company A.

Legislative references: Income Tax Assessment Act 1936 section 46 subsection 46(2B) Division 1A section 160APHD section 160APHI subsection 160APHI(2) subsection 160APHI(7)
Related public rulings and determinations: TD 2007/11
Other references: Explanatory Memorandum to Taxation Laws Amendment Bill (No. 2) 1999
Subject references: Qualified Person