Taxpayer Alert TA 2002/2: Scrip Loan and Option Arrangement
Date of issue: 14 February 2002
Status: Current


Description: Scrip Loan and Option Arrangement | This Taxpayer Alert describes an arrangement where a taxpayer enters into a scrip loan and takes out an option position over the same number of shares. | The alert applies to arrangements having the following features: 1. A company declares a franked dividend. 2. The taxpayer borrows a parcel of shares in the company cum dividend from a lender before the shares become ex dividend. 3. The taxpayer also purchases an option from the lender over the same number of shares in the same company. The option may be closed out or sold. The option is cash-settled (i.e. no right to call for the physical delivery of the shares). 4. The taxpayer cannot sell, assign, or deal with the shares in any way without the express written consent of the lender. 5. The taxpayer is not entitled to exercise any voting power in relation to the shares or to retain any bonus shares or capital repayments. 6. The taxpayer pays the lender a transaction fee which approximates the value of the cash dividend on the shares borrowed. 7. A franked dividend is paid on the shares and the taxpayer is entitled to the dividend and the franking credits. 8. The parcel of shares is returned to the lender after the dividend has been paid. 9. The taxpayer may be obliged to apply the dividend in satisfaction of the transaction fee by way of set-off or otherwise. 10. The taxpayer returns the grossed-up dividend as income, claims a tax offset for the franking credits and claims a deduction for the transaction fee. | 1. A company declares a franked dividend. 2. The taxpayer borrows a parcel of shares in the company cum dividend from a lender before the shares become ex dividend. 3. The taxpayer also purchases an option from the lender over the same number of shares in the same company. The option may be closed out or sold. The option is cash-settled (i.e. no right to call for the physical delivery of the shares). 4. The taxpayer cannot sell, assign, or deal with the shares in any way without the express written consent of the lender. 5. The taxpayer is not entitled to exercise any voting power in relation to the shares or to retain any bonus shares or capital repayments. 6. The taxpayer pays the lender a transaction fee which approximates the value of the cash dividend on the shares borrowed. 7. A franked dividend is paid on the shares and the taxpayer is entitled to the dividend and the franking credits. 8. The parcel of shares is returned to the lender after the dividend has been paid. 9. The taxpayer may be obliged to apply the dividend in satisfaction of the transaction fee by way of set-off or otherwise. 10. The taxpayer returns the grossed-up dividend as income, claims a tax offset for the franking credits and claims a deduction for the transaction fee. | The ATO considers that the arrangement outlined above gives rise to taxation issues which include: (a) The entitlement to franking credits. i) Whether the arrangement satisfies the "at risk" requirement for the holding period rule in relation to entitlement to franking credits; and ii) The arrangement raises questions about the application of the anti-avoidance provisions directed against franking credit trading. (b) The deductibility of the transaction fee. (c) The correct tax treatment of the option in this arrangement. (d) The application of the general anti-avoidance provisions of Part IVA of the ITAA 1936. | (a) The entitlement to franking credits. i) Whether the arrangement satisfies the "at risk" requirement for the holding period rule in relation to entitlement to franking credits; and ii) The arrangement raises questions about the application of the anti-avoidance provisions directed against franking credit trading. (b) The deductibility of the transaction fee. (c) The correct tax treatment of the option in this arrangement. (d) The application of the general anti-avoidance provisions of Part IVA of the ITAA 1936. | i) Whether the arrangement satisfies the "at risk" requirement for the holding period rule in relation to entitlement to franking credits; and ii) The arrangement raises questions about the application of the anti-avoidance provisions directed against franking credit trading. | The Australian Taxation Office is examining these arrangements.





Related documents: TD | 2003/32. | PS 2001/15 - Taxpayer Alerts | Section 8-1 of the ITAA 1997 | Part 3-1 of the ITAA 1997 | Part IVA of the ITAA 1936 | Section 177EA of the ITAA 1936

Large Business & International | Financial Services Industry Group - Finance Houses Team