ATO ID 2002/604: 45-day holding period rule - 'materially diminished' risks
Date of decision: 14 December 2001
Business line: Private Groups and High Wealth Individuals

Issue
For the purposes of subsection 160APHM(2) of the Income Tax Assessment Act 1936 (ITAA 1936), do the beneficiaries of a discretionary trust have 'materially diminished' risks in respect of their interests in the shares held by the trust?

Decision
Yes, for the purposes of subsection 160APHM(2) of the ITAA 1936 the beneficiaries of a discretionary trust do have "materially diminished" risks in respect of their interests in the shares held by the trust.

Facts
The trust is a discretionary trust. The beneficiaries do not have vested and indefeasible interests. The trustee purchased shares in the year 2000. The trustee has not entered into an option or any other derivative in relation to these shares. Franked dividends were paid on these shares.

Reasons for decision
Summary: To qualify for franking benefits a taxpayer must be a 'qualified person': as per section 160 APHO of Division 1A of Part IIIAA of the ITAA 1936 and hold the shares or interest in shares at risk for the minimum 'qualifying period'. Section 160APHO requires shares or interests in shares to be held at risk for 45 days (90 days for preference shares). However, days where the taxpayer has materially diminished risks of loss or opportunities for gain in respect of shares or interests in shares are not taken into account (subsection 160APHO(3)). There is a material diminution of risk if the taxpayer's net position is less than 30% (subsection 160APHM(2)). The net position is calculated by adding the sum of the taxpayer's long positions (+deltas) and the sum of the taxpayer's short positions (-deltas) (subsection 160APHJ(5)). In calculating a discretionary beneficiary's net position in the interest in the shares held by the trust, long and short positions are determined by an actual financial calculation or a deeming provision (subsection 160APHG(3) and subsections 160APHL(5)(8)(9)(10) and (11)). Subsection 160APHL(7) would deem the beneficiary's long position with a delta of +1. However, subsection 160APHL(10) would deem a short position with a delta of -1. The net position would be zero. Zero is less than 30% and so there is a material diminution of risk within subsection 160APHM(2).

Legislative references: Income Tax Assessment Act 1936 section 160APHO subsection 160APHG(3) subsection 160APHJ(5) subsection 160APHL(5) subsection 160APHL(7) subsection 160APHL(8) subsection 160APHL(9) subsection 160APHL(10) subsection 160APHL(11) subsection 160APHM(2) subsection 160APHO(3)
Subject references: Imputation system Discretionary trusts Trusts Shares Family trust election Imputation credits