ATO Interpretative Decision

ATO ID 2004/344

Income Tax

Holding period and related payment: small shareholder exemption
FOI status: may be released
  • Though Part IIIAA of the Income Tax Assessment Act 1936 ceased to have application from 1 July 2002, it is necessary to have regard to the rules in Division 1A of the former Part IIIAA in determining whether an entity is a qualified person for the purpose of the new rules contained in the Simplified Imputation System in respect of a franked distribution made directly or indirectly to the entity on or after 1 July 2002. Though Part IIIAA of the Income Tax Assessment Act 1936 ceased to have application from 1 July 2002, it is necessary to have regard to the rules in Division 1A of the former Part IIIAA in determining whether an entity is a qualified person for the purpose of the new rules contained in the Simplified Imputation System in respect of a franked distribution made directly or indirectly to the entity on or after 1 July 2002.

CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Will an individual who holds shares or an interest in shares in respect of which franked dividends were paid during the relevant year of income, qualify for the small shareholder exemption under section 160APHT of the Income Tax Assessment Act 1936 (ITAA 1936) if the shares were not held at risk for the requisite 45 days?

Decision

Yes. Pursuant to subsection 160APHT(1) of the ITAA 1936, where the total franking credits do not exceed $5,000, an individual will be entitled to the benefit of franking credits whether or not the shares or the relevant interest in shares had been held at risk for the requisite period of time, provided:

neither the individual nor an associate has made, is under an obligation to make, or is likely to make a related payment in respect of a particular dividend or distribution; and
where a franked dividend flows to a beneficiary via a trust on account of an interest in shares, the trustee of the trust is a qualified person in relation to the dividend.

Facts

The individual has 1000 DEF Ltd shares acquired on 12 July 1998. These shares became ex-dividend on 13 May 2002 paying a fully franked dividend of $0.70 per share on 25 May 2002. The total dividend received was $700 and the franking credit was $300.

The individual acquired 50 RST Ltd shares on 10 March 2002 and sold those shares on 8 April 2002. The shares became ex-dividend on 15 March 2002 paying a fully franked dividend of $7.00 per share on 12 April 2002. The total dividend was $350 and the franking credit was $150.

The individual is also a beneficiary of a non-fixed trust where there are no fixed entitlements to income or capital of the trust.

The trust was settled on 1 July 1998 and the individual has been a beneficiary since the trust was settled.

The individual was made presently entitled to income of the trust for the 2001-02 income year and is required to include, in their tax return, their share of the net income of the trust, being $2000 which included $1800 of franking credits.

The trustee acquired the shares resulting in franking credits attached to the distribution on 10 May 1999 and 1 July 2001.

The trustee of the trust was a qualified person in relation to all the shares it acquired.

The trustee of the trust did not make a family trust election.

The individual or an associate of the individual did not make, is not under an obligation to make and is not likely to make a related payment in respect of any dividend or distribution received.

Reasons for Decision

Section 160APHT of the ITAA 1936 refers to the small shareholder exemption. The small shareholder exemption treats a taxpayer that is an individual as a qualified person in relation to all dividends paid on shares that the taxpayer held or held an interest in during the relevant year of income, where the total of the associated franking rebates does not exceed $5000.

However, in accordance with subsection 160APHT(2) of the ITAA 1936 the individual will not be a qualified person in relation to a particular dividend where the individual, or an associate has made, is under an obligation to make, or is likely to make a related payment in respect of the dividend or distribution attributable to the dividend.

The facts reveal franking credits passing indirectly through a trust to the individual as well as franking credits attached to dividends on shares held directly by the taxpayer. There are no related payments made by the individual or an associate of the individual in relation to any of these dividends or distributions. Therefore, all the above-mentioned franking credits are taken into account in determining whether the small shareholder exemption applies to the individual in respect of the 2001-02 income year.

Therefore, in determining the taxpayer's entitlement to franking credits under section 160APHT of the ITAA 1936, it would not be necessary to consider if the relevant shares or interests in shares were held at risk for the requisite period or whether the relevant family trust elections were made. However, pursuant to subsection 160APHU(1) of the ITAA 1936, if a trustee of a trust is not a qualified person in relation to a dividend, then no beneficiary of the trust is a qualified person in relation to the dividend. Subsection 160APHU(1) makes it clear that this rule must be satisfied despite any other provision of Subdivision B of Division 1A of Part IIIAA of the ITAA 1936 (except for subsection 160APHH(6) of the ITAA 1936).

However, based upon the relevant facts, the trustee of the trust was a qualified person in relation to all of the abovementioned dividends paid on the shares. The total franking rebates from all sources, direct and indirect would be $2,250 ($300 + $150 + $1,800). As these amounts do not exceed the $5,000 threshold for the 2001-02 income year, the individual is a qualified person in accordance with section 160APHT of the ITAA 1936 in relation to all the dividends paid during that year.

Therefore, the taxpayer will be entitled to franking rebates of $2,250 in respect of the 2001-02 income year under section 160APHT of the ITAA 1936.

Date of decision:  19 April 2004

Year of income:  Year ended 30 June 2002

Legislative References:
Income Tax Assessment Act 1936
   section 160APHN
   section 160APHO
   section 160APHT
   section 160APHU

Keywords
Discretionary trusts
Dividend income
Franked dividends
Franking credits
Imputation credits
Imputation system
Individual shareholder dividend rebates
Shareholders
Shares
Trust beneficiaries
Trusts

Siebel/TDMS Reference Number:  3993253

Business Line:  Public Groups and International

Date of publication:  23 April 2004

ISSN: 1445-2782