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Edited version of private ruling

Authorisation Number: 1011811930550

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Ruling

Subject: Net position of shares

Question 1

In calculating the 'net position' in relation to the shares in company A under Division 1A of Part IIIAA of the Income Tax Assessment Act 1936 (ITAA 1936), should you aggregate all of your:

so as to arrive at a single net position in relation to company A shares?

Answer

Yes.

Question 2

In calculating the 'net position' in relation to the shares in company B under Division 1A of Part IIIAA of the ITAA 1936, should you aggregate all of your:

so as to arrive at a single net position in relation to company B shares?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You currently own shares in companies A and B, as well as a number of other listed and unlisted shares and securities.

Some of the shares are held by you directly (you are the registered holder as well as the beneficial owner), and some are held by a custodian on your behalf (the custodian is the registered holder and you are the beneficial owner).

From time to time you receive fully franked dividends in relation to those shares.

You also conduct a business of trading in securities (shares and options) including but not limited to trading in securities issued by both of those companies and options over those securities.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 1A Part IIIAA

Income Tax Assessment Act 1936 Subsection 160APHH(6)

Income Tax Assessment Act 1936 Section 160APHJ

Income Tax Assessment Act 1997 Section 207-145

Income Tax Assessment Act 1997 Section 207-150

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Taxation Determination TD 2007/29 discusses the holding period rule and share options. This Determination states that one of the underlying principles of the imputation system is that the benefits of imputation should be available only to the true economic owners of shares in a company. Therefore, broadly speaking, if there has been a material diminution in the risks of loss or opportunities for gain associated with share ownership, then a credit for the tax paid by a company can not be claimed under the imputation system. This is implemented by the qualified person rules contained in Division 1A of Part IIIAA of the ITAA 1936.

Division 1A of Part IIIAA of the ITAA 1936 remains an integral feature of the imputation system even after the introduction of the Simplified Imputation System. The rules contained in Division 1A of Part IIIAA of the ITAA 1936 continue to apply by virtue of sections 207-145 and 207-150 of the Income Tax Assessment Act 1997.

In determining whether a shareholder is a qualified person under Division 1A of Part IIIAA of the ITAA 1936 in relation to dividends paid on their shares, all 'positions' (for example, options) in respect of the shares are taken into account in identifying a 'net position' to ensure that there is no material diminution in the risks of loss or opportunities for gain. In accordance with subsection 160APHJ(2) of the ITAA 1936, a position in relation to a share is anything that has a 'delta' in relation to that share.

Delta is a financial concept that measures the change in price of a derivative (for example, an option) for a given small change in the price of an underlying asset. If a derivative has a delta in relation to an equity interest, it can be used to diminish the risks of loss or opportunities for gain associated with owning the interest. The purpose of Division 1A of Part IIIAA of the ITAA 1936 is to identify and measure that diminution and, where it is material, to deny access to the benefits of imputation.

For the purposes of this application, you have requested that the following be considered in order to determine your net position in relation to your shares in company A and B:

We will consider each of the above to determine whether they should be included in your net position.

Holdings registered in your name

Subsection 160APHJ(4) of the ITAA 1936 states that a share will have a delta of +1 in relation to itself and as such the shares registered in your name are taken into account in determining your net position.

Holdings registered in the name of a nominee/custodian

Subsection 160APHH(6) of the ITAA 1936 provides that where there is a single beneficiary who is absolutely entitled to the shares held by a bare trustee, the shares or interests are treated as being held by the beneficiary and not by the trustee.

The shares held in the name of a nominee/custodian as bare trustee will therefore be treated as being held by you, and will be taken into account in determining your net position for the same reason as discussed above for the holdings registered in your name.

Long and short option positions

Footnote 2 in TD 2007/29 states that the shareholder's net position in respect of the share is worked out by adding the shareholder's long positions in respect of the share and the shareholder's short positions in respect of the share.

The long and short option positions in relation to your shares will therefore be taken into account in determining your net position.

Summary

In calculating the 'net position' in relation to the shares in each company, you should aggregate all of your:

so as to arrive at a single net position in relation to the shares in that company.

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