Ruling Compendium

The ATO is introducing a new interpretation of the law.

The final Determination should only apply prospectively from the date of issue or after the ATO first issued a media statement on 3rd October 2013.

Paragraph 62 of TR 2006/10 further provides that there are situations where it is appropriate for a public ruling to have a prospective date of application, most notably where the ATO has facilitated or contributed to taxpayers adopting a different view of the law.

In the present situation, that there is no previous published ATO view document concerning the application of Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) to a dividend washing scheme. As is noted in the submissions, the PBR register contains edited versions of two relatively recent private rulings in respect of the 2013 income tax that potentially took the opposite view to that taken in the Determination. However, it is clear that a general administrative practice is not established where there is mere silence by the Commissioner (paragraph 3 of TD 2011/19) or where there are a few private rulings on a matter (paragraph 50 to 52 of TD 2011/19). PSLA 2011/27 provides similar guidance at paragraph 39.

As there is clearly no general administrative practice in this area, the ATO has not facilitated or contributed to taxpayers adopting a different view of the law. Accordingly, it is appropriate for the Determination to have both past and future application as per the guidance provided in TR 2006/10.

1)

there is a difference between the number of shares sold and then subsequently acquired that is 'substantially identical membership interest',

2)

there is a gap of a day or more between the sale of the original shares and the purchase of the cum-dividend shares, particularly where there is substantial price movement of the underlying security in the intervening period,

3)

the transaction results in a cash profit without taking into consideration the franking credits attached to the second lot of shares (Parcel B),

4)

the selling of shares ex dividend and subsequent buying of cum dividend shares 'are part of a broader commercial strategy and do not result in a prima facie cash loss.'

In relation to their being a difference between the number of shares sold and then subsequently reacquired the Determination at paragraph 11 states that the application of Part IVA would be limited to the acquisition of the same or substantially similar quantity of Parcel B shares to that of the Parcel A shares sold.

This is particularly the case given the comments from Gageler J in Mills v. Commissioner of Taxation (Mills) where (at Paragraph 66) it was stated that 'a purpose can be incidental even where it is central to the design of a scheme if that design is directed to the achievement of another purpose,' which in this case would be the derivation of the cash profit.

In any event a general discussion of the meaning of 'more than incidental purpose' is outside the scope of the Determination.

The impact of the decision in Mills on ATO policy is discussed in Decision Impact Statement DIS S225/2012 and includes discussion on 'incidental purpose'. Note the facts in that case are very different to the Example in the Determination.

1.

the participant in the example is the 'true economic owner' as they are exposed to the share price movement and holds the shares sufficiently at risk for the purpose of the 45 day rule (paragraph 24(a)),

2.

the draft Determination is only tenable to the extent there is a cash loss (paragraph 24(b)),

3.

the comments at paragraph 24(c) needs to be refined as the example is based on a single transaction not multiple transactions,

4.

paragraph 24(d) infers that the only reason for transactions to occur on the Special Market is to source the imputation benefit, this understates the commercial rationale for transactions where the Special Market is used to support the options market,

5.

the form and substance of the transaction is the same, the issue arising is that both parcels of shares have the entitlement to receive a dividend and franking credit, such that the franking credit claimed is disproportionate to the shares held, but this does not result in a conclusion that the substance of the transaction is different to the form (paragraph 24(e)).

1.

The participant in the Example in the Determination is the economic owner of 10,000 shares whilst the legal form is that the participant holds 20,000 shares.

The participant is only exposed to 10,000 shares whilst obtaining imputation benefits for 20,000 shares. Hence the participant is the true economic owner of 10,000 shares under the dividend washing scheme.

2.

The Example in the Determination results in a cash loss. This reflects real life examples of which the ATO is aware. No further examples were provided detailing other commercial strategies similar to the Example in the Determination, but which results in a cash positive situation where the target of the strategy is that commercial gain rather than the generation of additional franking credits.

3.

The strategy considered by the Determination can be in relation to a single transaction or multiple transactions.

4.

Whilst the Special Market can be used to settle options, it is unlikely that participants in dividend washing schemes are using the Special Market for this purpose, as they would have to pass ownership of any share acquired to settle options to the option counterparty prior to receiving any franked dividends.

5.

The form and substance of the transaction is not the same. There is a causal relationship between the sale of Parcel A and the acquisition of Parcel B which results in the participant being exposed to a single parcel of shares (the substance) instead of two parcels of shares (the form).

Section 177EA(4) states 'It is not to be concluded for the purpose of paragraph (3)(e) that a person entered into or carried out a scheme for a purpose mentioned in that paragraph merely because the person acquired membership interests, or an interest in membership interests, in the entity.'

Section 117EA(14)(b) does not override section 177EA(4) and section 177EA(4) makes it clear that any action captured by the definition in section 117EA(14)(b) needs to be something more than simply acquiring a membership interest.

The operation of section 177EA(4) does not appear to be constrained by any test referring to the source of the consideration used to acquire the membership interest.

Equally the ability to claim franking credits is not constrained by any consideration of what a shareholder may do with any consideration they may receive from the sale of relevant securities ex-dividend.

However the relevant circumstances as outlined in paragraph 25 of the Determination shows further features than just the mere acquisition of shares (Parcel B). The scheme in substance exposes the holder of Parcel A and Parcel B to the risk of a single parcel of shares whilst obtaining benefits on both. The scheme involves more than merely acquiring a membership interest in an entity. The scheme involves the sourcing of imputation benefits from the acquisition of the Parcel B shares on the Special Market, utilising the proceeds from the sale of Parcel A, with a before tax loss made on the transaction.

Section 177F deals with the cancellation of tax benefits obtained by a taxpayer in connection with a scheme, an analysis in relation to this section is outside the scope of the Determination.