Private ruling: Collar Strategy
Published: October 2014
Ruling period: Income year ended 30 June 2015 and future years (no end date)
Date scheme commenced: Scheme is yet to commence

Ruling: Q1: Does a net position in relation to shares, or an interest in shares, for the purposes of former section 160APHJ of the Income Tax Assessment Act 1936 (ITAA 1936) include all positions held by the Trustee for the trust (the Trust) in respect of those shares? | A1: Yes | Q2: Will the put and call options held by the Trust over shares, as described in the Collar Strategy, be related payments for the purposes of former section 160APHN ITAA 1936? | A2: No | Q3: Will the Trust satisfy the definition of a qualified person as defined in former section 160APHD ITAA of the ITAA 1936 in relation to the dividends paid on shares which are acquired by the Trust under the Collar Strategy? | A3: Yes | Q4: Will the Commissioner make a determination pursuant to paragraph 177EA(5)(b) of the ITAA 1936 to deny franking credits attached to dividends received by the Trust on shares acquired under the Collar Strategy? | A4: No

Relevant facts and circumstances: The Trustee has proposed a strategy to generate additional "alpha" for the Trust which will add to the risk exposure of the Trust. The strategy involves the use of put and call options.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 177EA, | Income Tax Assessment Act 1936 subsection 177EA(3), | Income Tax Assessment Act 1936 subsection 177EA(5), | Income Tax Assessment Act 1936 subsection 177EA(14), | Income Tax Assessment Act 1936 subsection 177EA(17), | Income Tax Assessment Act 1936 former section 160APHD | Income Tax Assessment Act 1936 former section 160APHJ, | Income Tax Assessment Act 1936 former subsection 160APHJ(4), | Income Tax Assessment Act 1936 former subsection 160APHJ(5), | Income Tax Assessment Act 1936 former subsection 160APHJ(9), | 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(4), | Income Tax Assessment Act 1936 former section 160APHO, | Income Tax Assessment Act 1936 former subsection 160APHO(2), | Income Tax Assessment Act 1936 former subsection 160APHO(3) | Income Tax Assessment Act 1936 former section 160APHE, | Income Tax Assessment Act 1936 former section 160APHM and | Income Tax Assessment Act 1936 former section 160APHH.

Reasons for decision: Detailed Reasoning - Issue 1 Question 1: A net position in relation to shares, or an interest in shares, should include all positions held by the Trust in respect of those shares. Under former subsection 160APHJ(5) ITAA 1936 the "net position" of a fund in relation to shares, or an interest in shares, is calculated by adding the fund's: a. long positions in the shares or interest (expressed as a delta); and b. short positions in the shares or interest (expressed as a delta) Delta is a financial concept that measures the change in the price of an option or derivative relative to a change in the price of an underlying asset. A 'long position' in relation to shares, or an interest in shares, is a position that has a delta of +1. Former subsection 160APHJ(4) provides that shares, or an interest in shares, are to be treated as a long position in relation to themselves. 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. Each of the sold call option and bought put option entered into by the Trust will constitute a 'short position' in respect of the shares and will be taken into account in determining the 'net position' of the Trust in relation to the shares. Where the Counterparty under the arrangement is an associate (as defined in former section 160APHD of the ITAA 1936) then former subsection 160APHJ(9) will apply to affect the Trust's position. The net position of the Trust in relation to a share in a particular company will be the aggregate of the delta of any 'long positions' and the delta of any 'short positions' held by the Trust in relation to the share. | Detailed Reasoning - Issue 1 Question 2: The put and call options held by the Trust over shares under the strategy will not represent a related payment for the purposes of former section 160APHN ITAA 1936. | Detailed Reasoning - Issue 1 Question 3: The Trust will meet the 'qualified person' test. The put and call options entered into by the Trust in relation to the shares held by the Trust will have a negative delta that will never be less than -0.7. The put and call options entered into by the Trust in relation to the shares held by the Trust will not result in a related payment that would impact the 'qualified person' test (paragraph 160APHJ(10)(c)) (see question 2 above). The shares, which are not preference shares, will be held for a minimum of 45 days (subsection 160APHO(2)) over which the Trust would not be considered to have 'materially diminished risks of loss or opportunities for gain in respect of the shares' (subsection 160APHO(3)). | Detailed Reasoning - Issue 2 Question 1: Section 177EA of the ITAA 1936 will not deny the Trust its entitlement to franking credits.