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Ruling
Subject: Cum-dividends franking offset
Question:
Where you meet the 45 day holding rule for both dividends, are you entitled to claim both imputation credit amounts as a franking rebate when you receive both an ordinary dividend and a cum dividend in relation to the same dividend distribution?
Answer:
Yes.
This ruling applies for the following period:
30 June 2013
The scheme commences on:
1 July 2012
Relevant facts and circumstances
After qualifying for the 45 day holding period, you plan to sell shares ex-dividend and then buy shares cum dividend (in the same company) on the same day and hold the cum dividend shares to meet the 45 day holding period rule. Each shareholding will be held fully at risk.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 216-5
Income Tax Assessment Act 1997 Section 207-145
Income Tax Assessment Act 1936 Section 160APHO
Income Tax Assessment Act 1936 Section160APHM
Income Tax Assessment Act 1936 Section160APHJ
Reasons for decision
When shares are traded cum dividend, section 216-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides the buyer of the shares is treated as the entity receiving the dividend (rather than the seller receiving it and then transferring it to the buyer) when the contract for sale is entered into in the course of trading on an approved stock exchange. A note in section 216-5 provides, for the entity receiving the distribution, there may be tax effects under Division 207.
Division 207 of the ITAA 1997 is about the effect of receiving a franked distribution. Of particular relevance is paragraph 207-145(1)(a), which provides, to qualify for franking benefits, a taxpayer must be a 'qualified person' under section 160APHO of Division 1A of Part IIIAA of the Income Tax Assessment Act 1936 (ITAA 1936) and hold the shares or interest in shares at risk for the minimum 'qualifying period'.
Section 160APHO of the ITAA 1936 requires shares or interests in shares to be held at risk for 45 days (90 days for preference shares). However, under subsection 160APHO(3), days, where the taxpayer has materially diminished risks of loss or opportunities for gain in respect of shares or interests in shares, are not taken into account when counting the days shares are held at risk. There is a material diminution of risk if the taxpayer's net position is less than 30% (see sections 160APHM and 160APHJ).
Taxation Determination TD 2003/32 provides an example of a scrip loan and call option arrangement in relation to cum dividend shares. Here, the taxpayer is not a qualified person in relation to the distribution under Division 1A of IIIAA of the ITAA 1936 because the scrip loan arrangement diminishes the 'at risk requirement'. In other words, the franking gross-up or tax offset is not denied merely because the taxpayer has entered into a cum dividend sale arrangement.
In your case, your scheme described in the facts is a straightforward purchase of cum dividend shares, where there is no materially diminished risk. It follows, where you meet the 45 day holding rule for both dividends, you are entitled to claim both imputation credit amounts as a franking rebate when you receive both an ordinary dividend and a cum dividend in relation to the same dividend distribution.
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