Private ruling: Investment strategy
Date of advice: 14 December 2015
Published: February 2016
Ruling period: Income year ended 30 June 2014
Date scheme commenced: May 2013

Ruling: Q1: Are you required to include in your assessable income the amount of the dividend distribution in relation to the shares under section 44 of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes | Q2: Are you required to include in your assessable income the franking credit attached to the dividend distribution in relation to the shares under section 207-20 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: Yes | Q3: Are you entitled to a tax offset equal to the franking credit attached to the dividend distribution made to you, in relation to the shares under section 207-20 of the ITAA 1997? | A3: Yes, where you satisfy the qualified person's rules under Division 1A of the former Part IIAA of the ITAA 1936.

Relevant facts and circumstances: An investment strategy was implemented by the trustee of the superannuation fund via their stock broker to increase diversification in their portfolio and/or reweight the portfolio and to take advantage of the "dividend run-up" phenomenon which some shares have a price run-up in the period leading up to the ex-dividend date. The strategy involved the trustee entering into a Securities Lending Agreement. To ensure entitlement to the franking credits attached to the dividends is available to the superannuation fund, the " net position" in respect of the share held in a company was at least 0.3 and the fund held the shares for the requisite period of 45 days (not including the day of acquisition or disposal of the share) in Division 1A of former Part IIIAA of the ITAA 1936.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 44 | Income Tax Assessment Act 1936 paragraph 44(1)(a) | Income Tax Assessment Act 1936 Division 1A of Part IIAA | Income Tax Assessment Act 1936 subsection 160APHJ(4) | Income Tax Assessment Act 1936 subsection 160APHJ(5) | Income Tax Assessment Act 1936 section 160APHM | Income Tax Assessment Act 1936 section 160APHO | Income Tax Assessment Act 1997 Division 207 | Income Tax Assessment Act 1997 Subdivision 207-C | Income Tax Assessment Act 1997 Subdivision 207-F | Income Tax Assessment Act 1997 subsection 207-20 | Income Tax Assessment Act 1997 subsection 207-20(2) | Income Tax Assessment Act 1997 section 207-140 | Income Tax Assessment Act 1997 section 995-1

Reasons for decision: Summary: Under the strategy the taxpayer holds the shares at the time a dividend is announced. Further the shares are sold on an ex-dividend basis (meaning that the buyer of those shares will not be entitled to the dividend announced). The taxpayer will receive a dividend from the relevant corporate entity for holding those shares. Paragraph 44(1)(a) of ITAA 36 states that the assessable income of a resident shareholder includes dividends that are paid to the shareholder by the company out of profits derived by it from any source. The dividend distributions received by the taxpayer in respect of its shares must be included in its assessable income for the relevant income year. Under section 207-20 of ITAA 1997, if an entity makes a franked distribution to another entity (in this case the taxpayer), the assessable income of the taxpayer includes the amount of the franking credit on the distribution, in the income year the distribution was made. As the taxpayer is entitled to receive franked distribution in relation to the shares then the taxpayer is required to include, in the income year the distribution was made, the franking credit. Subsection 207-20(2) of the ITAA 1997 provides that "the receiving entity is entitled to a tax offset for the income year in which the distribution is made. The tax offset is equal to the franking credit on the distribution." The above is subject to, amongst other things, Subdivision 207-C and Subdivision 207-F of the ITAA 1997. As the taxpayer is an Australian resident for taxation purposes at the time the taxpayer receives a distribution they will satisfy the requirements under Subdivision 207-C. Subdivision 207-F of the ITAA 1997 "cancel the effect of the gross-up and tax offset rules where the entity concerned manipulates the imputation system in a manner that is not permitted under the income law": section 207-140. This includes when a distribution is made to an entity that is not a qualified person for the purposes of Division 1A of former Part IIAA of the ITAA 1936 (Division 1A). Division 1A provides that an entity must hold shares (which are not preference shares), and where the taxpayer (or an associate of the taxpayer): • is not required to make a related payment in respect of the dividend and those shares will be held for a minimum of 45 days, • does not have a materially diminished risks of loss of opportunities for gain (section 160APHO of the ITAA 1936), and • net position worked out by reference to the shares delta is more than 30% (section 160APHM of the ITAA 1936). Under former subsection 160APHJ(5) of the ITAA 1936 the "net position" of an entity in relation to shares, or an interest in shares, is calculated by adding: a. the long positions in the shares or interest (expressed as a delta); and b. the 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) of the ITAA 1936 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. This includes a short sale and will be taken into account in determining the 'net position' in relation to the shares. The net position of the taxpayer 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 taxpayer. Based on the scheme, in relation to the shares the taxpayer would have held them for the requisite period of 45 days at risk and is therefore a qualified person.