Private ruling: Private ruling
Date of advice: 1 July 2016
Published: August 2016
Ruling period: Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019 | Year ending 30 June 2020 | Year ending 30 June 2021 | Year ending 30 June 2022
Date scheme commenced: 1 July 2016

Ruling: Q1: Is the Taxpayer a tax exempt entity for the purposes of Division 50 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Is the Taxpayer an exempt institution that is eligible for a refund pursuant to subsection 207-115(2) of the ITAA 1997? | A2: Yes. | Q3: Is the Taxpayer entitled to a refund equal to the franking credits attached to a franked distribution received by the Taxpayer in relation to the existing shares and the long position shares in the year of income in which the franked distribution is made pursuant to Division 67 of the ITAA 1997? | A3: Yes. | Q4: Will any franked distributions, in relation to the short position shares, and where the Securities Lending Agreement (SLA) is entered into by the Taxpayer, be attributed to the lender (and not the Taxpayer) under Division 216 of the ITAA 1997? | A4: Yes. | Q5: Will the Commissioner make a determination pursuant to paragraph 177EA(5)(b) of the Income Tax Assessment Act 1936 (ITAA 1936) to deny franking credits attached to dividends received by the Taxpayer in relation to the existing shares and long position shares? | A5: No. | Q6: Will section 207-157 of the ITAA 1997 apply to the transactions implemented under the Strategy? | A6: No.

Relevant facts and circumstances: 1. The Taxpayer is a public company, limited by guarantee. 2. The Taxpayer is a registered charity with the Australian Charities and Not-for-profits Commission, and is endorsed as exempt from income tax under Subdivision 50-B of the ITAA 1997. 3. The Taxpayer is an Australian resident for income tax purposes. 4. The Taxpayer operates solely within Australia, and makes grants and donations for charitable purposes to entities in Australia only. 5. The Taxpayer invests primarily in shares in unlisted companies and units in listed and unlisted unit trusts. 6. The Taxpayer is considering entering into an investment strategy listed below (the Strategy). 7. Generally, the Strategy may be adopted to satisfy one or more of the following objectives: • the development of a diversified share portfolio in circumstances where the investor has insufficient funds to buy all of the relevant shares outright; • the diversification and reweighting of an existing share portfolio (whether at a stock or security level, an industry sector level, a market level, a regional level or a manager level) in circumstances where the investor is seeking to gain access or reduce its exposure to a particular stock where it has insufficient funds to restructure its share portfolio outright; and • to exploit the dividend run-up phenomenon by which some shares have a price run-up in the period leading up to the ex-dividend date. 8. The Taxpayer's specific objective in implementing the Strategy is to exploit the dividend run-up phenomenon and, in doing so, to generate a positive return from trading gains and dividend distributions. The Strategy 9. The Strategy involves building a portfolio of shares from the top 20 Australian listed shares represented in the ASX 200 where there is an expectation these shares will outperform the overall market during the same period. 10. The key element to the Strategy is to select and buy those shares early. Historically, the value of those shares has outperformed the market when they go ex dividend. Outperformance may take the form of: • an increase in value in the lead up to the share's ex dividend dates; or • a decrease in value on their ex-dividend date by less than the value of the dividend received. When the acquisition of the shares is well-timed they can be expected to appreciate in value by the time other investors come into the market, which typically occurs 45 days before the shares go ex dividend. The Strategy will therefore give the Taxpayer the opportunity to maximise its returns through trading gains as well as distributions from dividend income (with any potential franking credits attached). 11. Buying early carries risks but maximises the potential return for the Taxpayer where the shares are acquired at their lowest prices and disposed of at their highest value in the cycle to take advantage of the underlying shares' outperformance before going ex dividend. 12. The Taxpayer may exit the Strategy early, including prior to the ex dividend date, where the share price has increased significantly. Rebalancing the portfolio 13. Once the portfolio is well diversified, it may need to be rebalanced periodically to match targeted investment goals. Rebalancing may involve buying or selling investments to return the portfolio to its original asset allocation. Risk 14. The key risks to the Strategy are: (a) shares not performing against benchmarks and expectations; (b) negative returns occurring in a falling market which, in the context of leveraging, may magnify any losses; and (c) the general risks associated with an equity investment. SLA 15. As part of implementing the Strategy, the Taxpayer (in the capacity of borrower) will enter into a SLA with a lender. Under the SLA, the lender agrees to loan securities to the Taxpayer for a specified period of time, with an associated agreement by the Taxpayer to return equivalent securities at the end of an agreed period. 16. The lender will procure the delivery of securities to the Taxpayer or deliver such securities in accordance with the SLA together with appropriate instruments of transfer. 17. Where income is paid by the issuer of any securities subject to the SLA, the Taxpayer will pay the lender a sum of money equivalent to the amount that the lender would have been entitled to receive by the relevant issuer (had such securities not been loaned to the Taxpayer). 18. The Taxpayer will not be required to provide collateral to the Lender. 19. The Taxpayer undertakes to redeliver equivalent securities to the lender in accordance with the SLA. Numerical example 20. The elements of the Strategy are provided in the following numerical example, however the actual number of shares may vary. (a) The Taxpayer holds 3,000 ABC shares on which it will receive a franked distribution and associated franking credits ('existing shares'). (b) The Taxpayer acquires a further 10,000 ABC shares (cum dividend shares) early in the semi-annual cycle which it holds at risk and in relation to which it intends to receive returns based on increased share price and a franked distribution ('long position shares'). (c) Simultaneously the Taxpayer short sells 7,000 ABC cum dividend shares (through the SLA) to partially: • cover its exposure to the market in relation to the long position, and • fund the long position ('short position shares'). (d) Once the ABC shares go ex dividend, • the long position shares will be partly closed (7,000 shares would be sold to settle short position pursuant to the SLA) ex dividend, and • the short position shares will be closed (settled pursuant to the SLA) cum dividend. (e) This leaves the Taxpayer with the net exposure of 6,000 ABC shares (being the 3,000 existing shares plus the difference between the long position shares and the short position shares). Assumptions 21. Existing shares and securities under the Strategy are equity interests for Division 974 of the ITAA 1997 purposes. 22. The franked distributions, which are frankable under section 202-40 and not unfrankable under section 202-45 of the ITAA 1997, are paid directly to the Taxpayer. 23. The Taxpayer has no influence on the franking policy of any entity it holds shares or securities in. 24. Distributions paid on the shares and securities will not be sourced, directly or indirectly, from unrealised or untaxed profits. 25. There are no transactional costs of entering into the transactions contemplated. 26. The Taxpayer will redeliver equivalent securities to the lender within 12 months of having borrowed securities from the lender under the terms of the SLA. 27. Preference shares will not be acquired under the Strategy. 28. The existing and long position shares will be held at risk for at least 45 days (excluding the date of acquisition and disposal) during the primary qualification period, as required by the qualified persons rule in Division 1A of former Part IIIAA of the ITAA 1936. 29. The net position of the Taxpayer in relation to its shares will be at least 0.3, per the formula in paragraph 4.75 of the Explanatory Memorandum to Taxation Laws Amendment Act (No. 2) 1999 , being [(number of existing shares and long position shares x 1) - (number of short position shares x 1)]/total number of shares held. 30. The Taxpayer will not be involved in an arrangement amounting to an obligation to make, or to be likely to make, a 'related payment' in respect of the existing and long position shares for the purposes of former section 160APHN of the ITAA 1936. 31. But for the operation of Division 50 of the ITAA 1997, franking credits attached to franked distributions received by the Taxpayer in respect of the existing shares and the long position shares would be included in the assessable income of the Taxpayer pursuant to subsection 207-20(1) of the ITAA 1997 for the income year in which the distribution is made. 32. The Taxpayer will be entitled to a tax offset equal to the franking credit on any franked distribution received by the Taxpayer in respect of the existing shares and the long position shares pursuant to subsection 207-20(2) of the ITAA 1997 for the income year in which the distribution is made. 33. For the purposes of section 216-30 of the ITAA 1997, the Taxpayer will give to the lender under the SLA a statement in the approved form setting out such information in relation to any distribution received by the Taxpayer in respect of the borrowed securities under the SLA as is required by the approved form. 34. All transactions entered into will be on arm's length terms. 35. The Taxpayer and the lender under the SLA are not associates.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 26BC(3) | Income Tax Assessment Act 1936 paragraph 26BC(3)(a) | Income Tax Assessment Act 1936 paragraph 26BC(3)(b) | Income Tax Assessment Act 1936 paragraph 26BC(3)(c) | Income Tax Assessment Act 1936 paragraph 26BC(3)(d) | Income Tax Assessment Act 1936 paragraph 26BC(3)(e) | Income Tax Assessment Act 1936 subsection 26BC(4) | Income Tax Assessment Act 1936 paragraph 26BC(4)(c) | Income Tax Assessment Act 1936 paragraph 26BC(4)(d) | Income Tax Assessment Act 1936 paragraph 26BC(4)(e) | Income Tax Assessment Act 1936 Division 1A of former Part IIIAA | Income Tax Assessment Act 1936 former section 160APHN | Income Tax Assessment Act 1936 paragraph 177D(2)(a) | Income Tax Assessment Act 1936 paragraph 177D(2)(b) | Income Tax Assessment Act 1936 paragraph 177D(2)(c) | Income Tax Assessment Act 1936 paragraph 177D(2)(d) | Income Tax Assessment Act 1936 paragraph 177D(2)(e) | Income Tax Assessment Act 1936 section 177EA | Income Tax Assessment Act 1936 subsection 177EA(3) | Income Tax Assessment Act 1936 paragraph 177EA(3)(a) | Income Tax Assessment Act 1936 paragraph 177EA(3)(b) | Income Tax Assessment Act 1936 paragraph 177EA(3)(c) | Income Tax Assessment Act 1936 paragraph 177EA(3)(d) | Income Tax Assessment Act 1936 paragraph 177EA(3)(e) | Income Tax Assessment Act 1936 subsection 177EA(5) | Income Tax Assessment Act 1936 paragraph 177EA(5)(b) | Income Tax Assessment Act 1936 subsection 177EA(17) | Income Tax Assessment Act 1936 paragraph 177EA(17)(a) | Income Tax Assessment Act 1936 paragraph 177EA(17)(i) | Income Tax Assessment Act 1997 Division 50 | Income Tax Assessment Act 1997 Subdivision 50-A | Income Tax Assessment Act 1997 section 50-1 | Income Tax Assessment Act 1997 section 50-5 | Income Tax Assessment Act 1997 section 50-47 | Income Tax Assessment Act 1997 section 50-50 | Income Tax Assessment Act 1997 section 50-52 | Income Tax Assessment Act 1997 Subdivision 50-B | Income Tax Assessment Act 1997 Division 67 | Income Tax Assessment Act 1997 section 67-25 | Income Tax Assessment Act 1997 subsection 67-25(1C) | Income Tax Assessment Act 1997 section 202-40 | Income Tax Assessment Act 1997 section 202-45 | Income Tax Assessment Act 1997 Division 207 | Income Tax Assessment Act 1997 section 207-20 | Income Tax Assessment Act 1997 subsection 207-20(1) | Income Tax Assessment Act 1997 subsection 207-20(2) | Income Tax Assessment Act 1997 subsection 207-115(2) | Income Tax Assessment Act 1997 section 207-117 | Income Tax Assessment Act 1997 section 207-157 | Income Tax Assessment Act 1997 paragraph 207-157(1)(a) | Income Tax Assessment Act 1997 paragraph 207-157(1)(b) | Income Tax Assessment Act 1997 subsection 207-157(3) | Income Tax Assessment Act 1997 Division 216 | Income Tax Assessment Act 1997 section 216-1 | Income Tax Assessment Act 1997 section 216-10 | Income Tax Assessment Act 1997 section 216-30 | Income Tax Assessment Act 1997 Division 974 | Income Tax Assessment Act 1997 subsection 995-(1)

Reasons for decision: Summary: 36. The Taxpayer is a tax exempt entity for the purposes of Division 50 of the Income Tax Assessment Act 1997 (ITAA 1997). | Detailed Reasoning - Detailed reasoning: 37. Division 50 of the ITAA 1997 contains provisions in relation to exempt entities for income tax purposes. 38. Section 50-1 of the ITAA 1997 provides that an entity covered by a table in Subdivision 50-A of the ITAA 1997 has their ordinary and statutory income exempt. 39. Item 1.1 of the table in section 50-5 of the ITAA 1997 includes a registered charity. This is subject to the special conditions in sections 50-47, 50-50 and 50-52 of the ITAA 1997. 40. The special conditions provide, inter alia , that the entity: (a) is registered with the Australian Charities and Not-for-profits Commission; (b) has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia; and (c) is endorsed as exempt from income tax under Subdivision 50-B of the ITAA 1997. 41. In the present case, the Taxpayer meets the special conditions in sections 50-47, 50-50 and 50-52 of the ITAA 1997. 42. Accordingly, the Taxpayer is a tax exempt entity for the purposes of Division 50 of the ITAA 1997. | Summary: 43. The Taxpayer is an exempt institution that is eligible for a refund pursuant to subsection 207-115(2) of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: 44. Subsection 207-115(2) of the ITAA 1997 states that an entity is an exempt institution that is eligible for a refund where: (a) the entity is covered by item 1.1 of the table in section 50-5 of the ITAA 1997; and (b) is endorsed as exempt from income tax under Subdivision 50-B of the ITAA 1997; and (c) satisfies the residency requirement. 45. For the purposes of determining whether an entity is an exempt institution that is eligible for a refund at the time a franked distribution is made, residency requirement is defined in subsection 995-1(1) of the ITAA 1997 to have the meaning in section 207-117 of the ITAA 1997, which provides that an entity satisfies the requirement where it: (a) has a physical presence in Australia; and (b) to that extent, incurs its expenditure and pursues its objectives principally in Australia; at all times during the income year in which the distribution is made. 46. Per the reasons in Question 1, the Taxpayer satisfies both section 207-117 and subsection 207-115(2) of the ITAA 1997. 47. Therefore, the Taxpayer is an exempt institution that is eligible for a refund pursuant to subsection 207-115(2) of the ITAA 1997. | Summary: 48. The Taxpayer is entitled to a refund equal to the franking credits attached to any franked distribution received by the Taxpayer in relation to the existing shares and the long position shares in the year of income in which the distribution is made pursuant to Division 67 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: 1. The refundable tax offset rules ensure that certain taxpayers are entitled to a refund once their available tax offsets have been utilised to reduce any income tax liability to nil. 2. Tax offsets available under Division 207 of the ITAA 1997 are subject to the refundable tax offset rules unless specifically excluded under section 67-25 of the ITAA 1997. 3. Entities excluded under section 67-25 of the ITAA 1997 include corporate tax entities (such as companies, corporate limited partnerships, corporate unit trusts and public trading trusts) entitled to a tax offset under Division 207 of the ITAA 1997 because a franked distribution is made directly to the entities, unless they satisfy the requisite conditions as set out in subsection 67-25(1C) of the ITAA 1997. 4. In the present case, the Taxpayer is an exempt institution that is eligible for a refund (as confirmed in response to Question 2), hence the requisite condition in subsection 67-25(1C) of the ITAA 1997 being satisfied. 5. Accordingly, the Taxpayer is entitled to a refund equal to the franking credits attached to any franked distribution received by the Taxpayer in relation to the existing shares and the long position shares in the year of income in which the distribution is made pursuant to Division 67 of the ITAA 1997. | Summary: 6. Any franked distributions, in relation to the short position shares, and where the SLA is entered into by the Taxpayer, will be attributed to the lender (and not the Taxpayer) under Division 216 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: 7. Subsection 26BC(4) of the ITAA 1936 provides that, where the conditions contained in subsection 26BC(3) of the ITAA 1936 have been met, and there has been a disposal of a security under a securities lending arrangement or a security has been reacquired under a securities lending arrangement, the lender's position in respect of those arrangements will be determined as if: (a) the lender had not disposed of the borrowed security or acquired a replacement security: paragraph 26BC(4)(c) of the ITAA 1936 (b) the borrowed security was held by the lender at all times during the borrowing period: paragraph 26BC(4)(d) of the ITAA 1936, and (c) the replacement security given by the borrower to the lender was the original security, whether or not that security is the identical security: paragraph 26BC(4)(e) of the ITAA 1936. 8. The result is that the lender will not be subject to any tax consequences in respect of the disposal and reacquisition of the relevant securities. 9. The SLA entered into under the Strategy satisfies the conditions in subsection 26BC(3) of the ITAA 1936, in that: (a) the SLA is in writing (paragraph 26BC(3)(a)); (b) an equivalent security is returned within 12 months after the borrowed security is lent (paragraph 26BC(3)(a)); (c) the borrower (i.e. the Taxpayer) and the lender deal at arm's length in relation to the transaction (paragraph 26BC(3)(b)); (d) the lender receives from the borrower a payment equal to the value of any distribution made in respect of the borrowed security (paragraph 26BC(3)(c)); (e) the consideration paid by the borrower (including any fee) is specifically identified (paragraph 26BC(3)(d)); and (f) the lender retains the total consideration due under the agreement (paragraph 26BC(3)(e)). 10. Section 216-1 of the ITAA 1997 provides that there are situations in which a franked distribution, or a distribution franked with an exempting credit, that is made to a member of a corporate tax entity is taken to have been made to another entity. 11. Section 216-10 of the ITAA 1997 states that the distribution will be attributed to the lender where: (a) the corporate tax entity makes a franked distribution, or a distribution franked with an exempting credit, to a member of the entity in respect of a membership interest in the entity; and (b) at the time the distribution was made, the member was under an obligation to pay the distribution to another person under a securities lending arrangement; and (c) the obligation was incurred in the member's capacity as the borrower under the securities lending arrangement; and (d) the distribution closing time occurred during the borrowing period. 12. In the present case, any franked distribution paid by a corporate tax entity on the short position shares will be paid directly to the Taxpayer. 13. Under the relevant SLA (as noted above), the Taxpayer (in its capacity as the borrower) will pay an equivalent amount of the franked distribution on the short position shares to the lender whilst it holds the securities under the SLA. 14. Accordingly, any franked distributions, in relation to the short position shares, and where a SLA is entered into by the Taxpayer, will be attributed to the lender (and not the Taxpayer) under Division 216 of the ITAA 1997 and the tax effects of receiving those franked distributions (including any franking benefits) fall to the lender. | Summary: 15. The Commissioner will not make a determination pursuant to paragraph 177EA(5)(b) of the Income Tax Assessment Act 1936 (ITAA 1936) to deny franking credits attached to dividends received by the Taxpayer in relation to the existing shares and long position shares. | Detailed Reasoning - Detailed reasoning: 16. Section 177EA of the ITAA 1936 is a general anti-avoidance provision that applies where a purpose (other than an incidental purpose) of the scheme is to obtain an imputation benefit. In these circumstances, subsection 177EA(5) of the ITAA 1936 enables the Commissioner to make a determination with the effect of either: • imposing franking debits or exempting debits on the distributing entity's franking account, or • denying the imputation benefit on the distribution that flowed directly or indirectly to the relevant taxpayer. 17. Pursuant to subsection 177EA(3) of the ITAA 1936, section 177EA applies if the following conditions are satisfied: (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. 18. The Commissioner considers that the conditions in paragraphs 177EA(3)(a) to 177EA(3)(d) of the ITAA 1936 are satisfied. 19. Accordingly, the issue is whether, having regard to the relevant circumstances of the scheme, it would be concluded that a person, or one of the persons, who entered into or carried out the scheme, did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling the Taxpayer to obtain an imputation benefit (paragraph 177EA(3)(e) of the ITAA 1936). 20. Circumstances which are relevant in determining whether any 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. Due to the diverse nature of these circumstances, some may or may not be present at any one time in relation to a particular scheme. 21. In the present case, the Strategy may generate trading gains, dividends and franking credits however there is a risk that trading losses will arise in relation to the scheme if the shares do not outperform the market. The period in which the shares are held is determined by the Taxpayer to maximise the potential for trading gains under the 'dividend run-up' phenomenon (paragraph 177EA(17)(a)). 22. The Taxpayer will hold most of the existing and long position shares for at least 45 days prior to the shares going ex dividend and have a minimum net delta of 0.3. Holding the shares for that time period is inherent to the Strategy and in taking advantage of the dividend run-up phenomenon. It is also noted that the Taxpayer may exit the Strategy early, including prior to the ex dividend date, where the share price has increased significantly (paragraph 177EA(17)(i)). 23. The manner of the Strategy is to partially finance the long position shares by entering into the SLA for the short position shares and to take advantage of the dividend run-up. The Strategy involves trading within the 45 day holding period rule and structuring the Strategy in such a way that it complies with the qualified person rules under former Division 1A of former Part IIIA of the ITAA 1936. The possibility of the run-up gain is relevant to this matter and must be considered against the relative certainty of the dividend and the attached franking credit. It is accepted that the intention of the Strategy is to make a before tax return that may consist of run-up gains, and that enabling the Taxpayer to acquire additional shares where there is insufficient funds to buy all the relevant shares is its primary objective (paragraph 177D(2)(a) and 177D(2)(b)). 24. The timing of the Strategy to a certain extent is short term in that most of the long position shares will be sold once they go ex dividend. Implicit in this Strategy is the intention to capture dividends and any associated franking benefits however it is accepted that part of the Strategy is also geared towards making trading gains in the run-up to the ex dividend date. In this case, this matter is co-extensive with paragraph 177EA(17)(i) (paragraph 177D(2)(c)). 25. Utilising the short position shares, the Taxpayer is able to partially finance the purchase of the long position shares and at the end of the Strategy increase (being the difference between the long position shares and the short positions shares) its shareholding in the particular company. It is likely that the Taxpayer will be entitled to claim the imputation benefits on the long position shares and their financial position will be improved by claiming the imputation benefits and receiving a refundable tax offset equal to the imputation benefits (paragraphs 177D(2)(d) and 177D(2)(e)). 26. Based on the information provided and the assumptions set out in this ruling, and having regard to all the relevant circumstances of the scheme, the Commissioner has concluded that the purpose of enabling the Taxpayer to obtain imputation benefits is not more than incidental to the Taxpayer's purpose of maximising its equity investments. 27. Accordingly, the Commissioner will not make a determination under paragraph 177EA(5)(b) of the ITAA 1936 to deny the whole, or any part, of the imputation benefits received by the Taxpayer in relation to the existing and long position shares. | Summary: 28. Section 207-157 of the ITAA 1997 will not apply to the transactions implemented under the Strategy. | Detailed Reasoning - Detailed reasoning: 29. The amount of the franking credit on a franked distribution made to an entity is not included in the assessable income of the entity under section 207-20 of the ITAA 1997, and the entity is not entitled to a tax offset under that provision because of the distribution, where the distribution is one to which section 207-157 (about distribution washing) applies. Section 207-157 will apply to a franked distribution in respect of a membership interest (the washed interest) where two requirements have been met: a) the washed interest must have been acquired after the member, or a connected entity of the member, disposed of a substantially identical membership interest: paragraph 207-157(1)(a), and b) a corresponding franked distribution must have been made to the member, or a connected entity, in respect of the substantially identical interest: paragraph 207-157(1)(b). 30. A connected entity is defined under subsection 995-1(1) of the ITAA 1997 to mean an associate of the entity; or another member of the same wholly owned group if the entity is a company and is a member of such a group. 31. Without limiting paragraph 207-157(1)(a), subsection 207-157(3) of the ITAA 1997 further provides that for the purpose of that paragraph a membership interest is substantially identical to the washed interest if it is any one or more of the following: (a) fungible with, or economically equivalent to, the washed interest; (b) a membership interest in the same *corporate tax entity as the washed interest and of a class that is the same as, or not materially different from, the washed interest; (c) a membership interest in the same corporate tax entity as the washed interest and of a class that is exchangeable at a fixed rate for an interest of the same class as the washed interest; (d) a membership interest in another corporate tax entity that holds predominantly membership interests that are covered by any of the preceding paragraphs; (e) a membership interest in another corporate tax entity that is exchangeable at a fixed rate for interests that are covered by any one or more of paragraphs (a) to (c). 32. Part of the Strategy involves selling of the long position shares to fund the purchase of shares (short position shares) in the same corporate entity in order to satisfy the SLA entered into by the Taxpayer with the lender. The Taxpayer and the lender are not associates. 33. The purchase of the short position shares is a 'washed interest' for the purpose of paragraph 207-157(1)(a) and subsection 207-157(3) of the ITAA 1997. 34. Where the Taxpayer (in its capacity as the borrower) under a SLA receives a franked distribution, but is under an obligation to pay the distribution to the lender under that agreement, section 216-10 of the ITAA 1997 causes the distribution to be treated as having been made to the lender (and not to the borrower), as confirmed in response to Question 4 of this ruling. Accordingly, the tax effects of receiving the distribution (including any franking benefits) fall to the lender. Therefore the distribution of the short position shares will be paid to the lender. 35. As the Taxpayer and the lender are not connected entities the washed interest does not satisfy paragraph 207-157(1)(b), thus section 207-157 does not apply to the transactions implemented under the Strategy.