Private ruling: Qualified person
Date of advice: 8 February 2018
Published: June 2018
Ruling period: Income tax year ended 30 June 2018 | Income tax year ended 30 June 2019
Date scheme commenced: 01 July 2017

Ruling: Q1: Will Company A as trustee of Fund A be a qualified person for the purposes of Division 1A of former Part IIIAA of the Income Tax Assessment Act 1936 (ITAA 1936) and paragraph 207-145(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to any franked distributions it receives as part of its investment portfolio after entering into an equity swap arrangement? | A1: Yes. | Q2: Will the Commissioner make a determination under paragraph 177EA(5)(b) of the ITAA 1936 that no imputation benefit is to arise in respect of a distribution made, or that flows indirectly, to the Trustee? | A2: No.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. Fund A is an Australian superannuation fund. Fund A is a complying superannuation fund within the meaning of section 45 of Superannuation Industry (Supervision) Act 1993 . Fund A is managed on a day to day basis by the Trustee (Company A). Company A engages fund managers to invest the funds it holds. Company A’s investment portfolio includes Australian share investments. Company A intends to enter into an equity swap with a counterparty (i.e. an Australian bank) that holds a global equities portfolio. This will convert part of the Australian shares exposure to an international shares exposure. However, Company A intends to retain the dividend flow on its Australian shares investments. Company A will not swap more than 40% of the capital exposure of each share in its Australian equities portfolio at any particular time.

Relevant legislative provisions: Income Tax Assessment Act 1936 former Division 1A of Part IIIA | Income Tax Assessment Act 1936 former section 160APHD | Income Tax Assessment Act 1936 former section 160APHE | Income Tax Assessment Act 1936 former section 160APHJ | Income Tax Assessment Act 1936 former subsection 160APHJ(3) | Income Tax Assessment Act 1936 former subsection 160APHJ(5) | Income Tax Assessment Act 1936 former subsection 160APHL(7) | Income Tax Assessment Act 1936 former subsection 160APHM(2) | Income Tax Assessment Act 1936 former section 160APHN | Income Tax Assessment Act 1936 former subsection 160APHN(2) | Income Tax Assessment Act 1936 former subsection 160APHN(3) | Income Tax Assessment Act 1936 former subsection 160APHN(4) | Income Tax Assessment Act 1936 former section 160APHO | Income Tax Assessment Act 1936 former subsection 160APHO(1) | Income Tax Assessment Act 1936 former paragraph 160APHO(1)(a) | Income Tax Assessment Act 1936 former subsection 160APHO(2) | Income Tax Assessment Act 1936 former subparagraph 160APHO(2)(a)(i) | Income Tax Assessment Act 1936 former subparagraph 160APHO(2)(a)(ii) | Income Tax Assessment Act 1936 former subsection 160APHO(3) | Income Tax Assessment Act 1936 former section 160APHU | Income Tax Assessment Act 1936 former subsection 160APHU(1) | Income Tax Assessment Act 1936 Part IVA | Income Tax Assessment Act 1936 subsection 177D(2) | Income Tax Assessment Act 1936 section 177EA | Income Tax Assessment Act 1936 subsection 177EA(5) | Income Tax Assessment Act 1997 section 204-30 | Income Tax Assessment Act 1997 section 207-150 | Income Tax Assessment Act 1997 subsection 207-150(1) | Income Tax Assessment Act 1997 paragraph 207-150(1)(a) | Income Tax Assessment Act 1997 section 960-130 | Income Tax Assessment Act 1997 section 960-135 Question 1 | Summary | The Trustee will have a net position of at least 30% exposure to the risks of loss and opportunities of gain in relation to the shares it owns and it will hold such a net position in respect of those shares for the requisite holding period after entering into an equity swap arrangement. Accordingly, the Trustee will be a qualified person for the purposes of Division 1A of former Part IIIAA of the ITAA 1936 and paragraph 207-145(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to franked distributions it receives as part of its portfolio. Detailed reasoning | Subsection 207-145(1) of the Income Tax Assessment Act 1997 (ITAA 1997) relevantly states: | (1) If a *franked distribution is made to an entity in one or more of the following circumstances: | (a) the entity is not a qualified person in relation to the distribution for the purposes of Division 1A of former Part IIIAA of the Income Tax Assessment Act 1936 ; … | then for the purposes of this Act: (e) the amount of the franking credit on the distribution is not included in the assessable income of the entity under section 207-20 or 207-35; … | The main test of what constitutes a ‘qualified person’, commonly known as the holding period rule, is contained in former section 160APHO of the ITAA 1936, which states: | (1) A taxpayer who has held shares or an interest in shares on which a dividend has been paid is a qualified person in relation to the dividend if: | (a) where neither the taxpayer nor an associate of the taxpayer has made, is under an obligation to make, or is likely to make, a related payment in respect of the dividend – the taxpayer has satisfied subsection (2) in relation to the primary qualification period in relation to the dividend; or | (b) where the taxpayer or an associate of the taxpayer has made, is under an obligation to make, or is likely to make, a related payment in respect of the dividend – the taxpayer has satisfied subsection (2) in relation to the secondary qualification period in relation to the dividend. | (2) A taxpayer who has held shares or an interest in shares on which a dividend has been paid satisfies this subsection in relation to a qualification period in relation to the shares or interest if, during the period: | (a) where the taxpayer held the shares – the taxpayer held the shares for a continuous period (not counting the day on which the taxpayer acquired the shares or, if the taxpayer has disposed of the shares, the day on which the disposal occurred) of not less than: | (i) if the shares are not preference shares – 45 days; or | (ii) if the shares are preference shares – 90 days. | (b) where the taxpayer held the interest in the shares – the taxpayer held the interest for a continuous period (not counting the day on which the taxpayer acquired the interest or, if the taxpayer has disposed of the interest, the day on which the disposal occurred) of not less than: | (i) if the shares are not preference shares – 45 days; or | (ii) if the shares are preference shares – 90 days. | … | Related payments rule | To determine what the relevant qualification period is for the purposes of former paragraph 160APHO(1)(a) of the ITAA 1936, it is necessary to determine whether the Trustee has made, or is under an obligation to make, or is likely to make, a related payment in respect of any of the dividends it receives. | Former section 160APHN of the ITAA 1936 gives examples of, but does not limit, what constitutes the making of a related payment by the Trustee in respect of a dividend paid in respect of shares, or in respect of a distribution made in respect of an interest in shares, held by Company A. Relevantly, former subsection 160APHN(2) provides: | The taxpayer or associate is taken, for the purposes of this Division, to have made, to be under an obligation to make, or to be likely to make, a related payment in respect of the dividend or distribution if, under an arrangement, the taxpayer or associate has done, is under an obligation to do, or may reasonably be expected to do, as the case may be, anything having the effect of passing the benefit of the dividend or distribution to one or more other persons. | In broad terms, former section 160APHN provides that any mechanism that passes on the economic benefit of a dividend to a third party will constitute the making of a related payment. | Qualification periods | If the Trustee (as shareholder) is not taken to pass the benefit of the dividend to another person in the circumstances set out above, the Trustee will need to satisfy the primary qualification period in respect of the dividend in order to be a qualified person. | However, if the Trustee is taken to pass the benefit of the dividend to another person in the circumstances set out above, the Trustee will need to satisfy the secondary qualification period in respect of the dividend in order to be a qualified person. | In this case, the Equity Swap that will be entered into by the Trustee exchanges the capital performance of Australian equities for the capital performance of international equities. The Equity Swap will not take into account any dividends that are paid on shares that Company A holds in its various portfolios. | This means that in relation to the Equity Swap, the Trustee will not have made, be under an obligation to make, nor be likely to make, a related payment in respect of any dividends paid on the shares that Company A holds in its various portfolios. | Accordingly, under former paragraph 160APHO(1)(a) of the ITAA 1936, the relevant qualification period for the Trustee is the primary qualification period. This is defined in former section 160APHD in relation to a taxpayer’s shares or an interest in shares, to mean: | …the period beginning on the day after the day on which the taxpayer acquired the shares or interest and ending: | (a) if the shares are not preference shares - on the 45 th day after the day on which the shares or interest became ex dividend ; or | (b) if the shares are preference shares - on the 90 th day after the day on which the shares or interest became ex dividend . | Former section 160APHE of the ITAA 1936 defines ex dividend to mean: | (1) A share in respect of which a dividend is to be paid, or an interest (other than an interest as a beneficiar y of a widely held trust) in such a share, becomes ex dividend on the day after the last day on which the acquisition by a person of the share will entitle the person to receive the dividend. | (2) An interest as a beneficiary of a widely held trust in a share in respect of which a dividend is to be paid becomes ex dividend on the day after the last day on which the acquisition by a person of the interest will entitle the person to receive a distribution from the trust. | Holding period rule | If the shares held by the Trustee are not preference shares, then the Trustee is required to hold the shares on which a dividend has been paid for a continuous period of at least 45 days during the primary qualification period (former subparagraph 160APHO(2)(a)(i) of the ITAA 1936). | However, if the shares held by the Trustee are preference shares, then the Trustee is required to hold the shares on which a dividend has been paid for a continuous period of at least 90 days during the primary qualification period (former subparagraph 160APHO(2)(a)(ii) of the ITAA 1936). | In determining whether the Trustee held the shares, or interest in shares, for at least 45 or 90 days in the primary qualification period, the Trustee does not count the day on which it acquired the shares or interest in shares. If the Trustee has disposed of the shares or interest in shares, it does not count the day on which the disposal occurred (former paragraph 160APHO(2)(a) of the ITAA 1936). | Further, former subsection 160APHO(3) of the ITAA 1936 states: | In calculating the number of days for which the taxpayer continuously held the shares or interest, any days on which the taxpayer has materially diminished risks of loss or opportunities for gain in respect of the shares or interest are to be excluded, but the exclusion of those days is not taken to break the continuity of the period for which the taxpayer held the shares or interest. | Former subsection 160APHM(2) of the ITAA 1936 states: | A taxpayer is taken to have materially diminished risks of loss or opportunities for gain on a particular day in respect of shares held by the taxpayer, or in respect of an interest held by the taxpayer in shares, if the taxpayer’s net position on that day in relation to the shares or interest has less than 30% of those risks and opportunities. | Former subsection 160APHJ(5) of the ITAA 1936 provides that the ‘net position’ of a taxpayer or fund in relation to shares, or in relation to an interest in shares, is calculated by adding the taxpayer’s or fund’s long position in the relevant shares or interest and short positions in the shares or interest. | Former subsection 160APHJ(3) of the ITAA 1936 provides that a ‘short position’, in relation to shares or an interest in shares, is a position that has a negative delta in relation to the shares or interest. | Former subsection 160APHJ(4) of the ITAA 1936 provides that a ‘long position’, in relation to shares or an interest in shares, is a position that has a positive delta in relation to the shares or interest. The subsection confirms that shares or interests in shares are to be treated as a long position (with a delta of +1) in relation to themselves. | Calculation of the Company A net position | In calculating the net position of the Trustee in respect of the Australian shares it holds and the effect that the Equity Swap will have on this, it is necessary to compare the Company A long and short positions in relation to the relevant shares or interest in the shares. | The Trustee will have a long position with a delta of plus 1 (+1) in relation to Australian shares in the Australian share investments, as these shares are held by Company A with 100% exposure to the risks of loss or opportunities of gains. | For the purposes of former subsection 160APHJ(5) of the ITAA 1936, the Trustee’s net position on a particular day in relation to the shares or interest in shares held in the Australian share investments will be no less than 60%. Provided that the Trustee’s net position does not fall below 30% on any particular day in relation to the shares, or interest in shares, it will not be taken to have materially diminished risks of loss or opportunities for gain while party to the Equity Swap in relation to the shares it holds in its portfolio. | In summary, the Trustee will be a qualified person in relation to the franked distributions received in respect of shares held, provided the following conditions are satisfied: | ● The Trustee does not make any related payments | ● The Trustee has a ‘net position’ of at least +0.3 in relation to the relevant shares | ● While a party to the Equity Swap, the Trustee holds the relevant shares for the requisite holding period of 45 or 90 days (depending on whether or not those shares are preference shares). | Question 2 | Detailed reasoning | Section 177EA of the ITAA 1936 is a general anti-avoidance provision. Its object is to prevent abuse of the imputation system through schemes which circumvent the basic rules for the franking of distributions. If the section applies, subsection 177EA(5) empowers the Commissioner to make a determination to create a franking debit or cancel a franking credit. | The conditions for the application of section 177EA of the ITAA 1936 are set out in subsection 177EA(3) which states: | This section [177EA] applies if: | (a) there is a scheme for a disposition of membership interests, or an interest in membership interests, in a corporate tax entity; and | (b) either: | (i) a frankable distribution has been paid, or is payable or expected to be payable, to a person in respect of the membership interests; or | (ii) a frankable distribution has flowed indirectly, or flows indirectly or is expected to flow indirectly, to a person in respect of the interest in membership interests, as the case may be; and | (c) the distribution was, or is expected to be, a franked distribution or a distribution franked with an exempting credit; and | (d) except for this section, the person (the relevant taxpayer) would receive, or could reasonably be expected to receive, imputation benefits as a result of the distribution; and | (e) having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling the relevant taxpayer to obtain an imputation benefit. | A ‘membership interest’ is defined in section 960-135 of the ITAA 1997 to mean: | If you are *member of an entity: | (a) each interest, or set of interests, in the entity; or | (b) each right, or set of rights, in relation to the entity: | by virtue of which you are a member of the entity is a membership interest of yours in the entity. | Pursuant to section 960-130 of the ITAA 1997, a ‘member’ means: | ● in relation to a company – a member of the company or stockholder in the company | ● in relation to a trust – a beneficiary, unitholder or object of the trust. | The meaning of ‘interest in membership interests’ is defined in subsection 177EA(13) of the ITAA 1936, which relevantly states: | A person has an interest in membership interests if: | (a) the person has any legal or equitable interest in the membership interests; or | … | (c) the person is a beneficiary of a trust (including a potential beneficiary of a discretionary trust) and: | (i) the membership interests form, or will form, part of the trust estate; or | (ii) the trust derives, or will derive, income indirectly through interposed companies, trusts or partnerships, from distributions made on the membership interests. | A ‘scheme for disposition of membership interests or an interest in membership interests’ as defined in subsection 177EA(14) of the ITAA 1936 relevantly includes: | (a) issuing the membership interests or creating the interest in membership interests; | (b) entering into any contact, arrangement, transaction or dealing that changes or otherwise affects the legal or equitable ownership of the membership interests or interest in membership interests; | … | (d) Creating, altering or extinguishing a right, power or liability attaching to, or otherwise relating to, the membership interests or interest in membership interests; | (e) Substantially altering any of the risks of loss, or opportunities for profit or gain, involved in holding or owning the membership interests or having the interest in membership interests; … | On the facts, the conditions in paragraphs 177EA(3)(a) to (d) of the ITAA 1936 are satisfied. | The remaining condition is whether, having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling the relevant taxpayer (the Trustee) to obtain an imputation benefit (paragraph 177EA(3)(e) of the ITAA 1936) (the requisite purpose). | This is a test of objective purpose. Circumstances which are relevant in determining whether the Trustee or any other person has the requisite purpose include, but are not limited to, the factors listed in subsection 177EA(17) of the ITAA 1936. The relevant circumstances listed encompass a range of circumstances which, taken individually or collectively, could indicate the requisite purpose. The factors include: | ● the extent and duration of the risks of ownership (paragraph 177EA(17)(a)); | ● the tax profiles of the parties to the scheme (paragraphs 177EA(17)(b), (c), (d) and (e)); | ● any consideration paid by or to the relevant taxpayer (paragraph 177EA(17)(f)); | ● associated deductions or losses (paragraphs 177EA(17)(g) and (ga)); | ● equivalence to interest (paragraph 177EA(17)(h)); | ● length of the period for which the membership interests are held (paragraph 177EA(17)(i)); and | ● other factors regarding the manner, form and effect of the scheme and nature of any connection with other persons (paragraph 177EA(17)(j) and 177D(2)). | On the basis of the arrangement it is considered that any purpose of Company A of deriving an imputation benefit is merely incidental to its main commercial objectives of entering into the Equity Swap for the longer term interest of Company A and its members. Accordingly, the condition in paragraph 177EA(3)(e) of the ITAA 1936 is not satisfied and the Commissioner will not make a determination under paragraph 177EA(5)(b) of the ITAA 1936.