Edited version of your private ruling

Authorisation Number: 1012563077565

Ruling

Subject: Part IVA - share trading arrangement

Question 1

Will the Commissioner make a determination under paragraph 177EA(5)(b) of the Income Tax Assessment Act 1936 (ITAA 1936) that no imputation benefit is to arise in respect of a distribution that is made to you under the scheme as set out in this ruling?

Answer

Yes

This ruling applies for the following periods:

Income Tax Year ended 30 June 2014

Relevant facts and circumstances

You are the trustee for a self managed superannuation fund (Super Fund).

All or part of the Super Fund's investment is shares listed on the Australian Securities Exchange (ASX).

Part of the investment strategy for the Super Fund is to invest in shares to earn dividend income and where available obtain franking credits.

The investment strategy also includes the following transactions to be undertaken ("franking credit strategy"):

a. The Super Fund has shares in 'Company A'. Company A is publicly listed on the ASX.

b. Company A announces a fully franked dividend of 14c per share with a franking credit of 6c per share.

c. Prior to the dividend being announced, you hold a total of 20,000 shares in Company A of which-

i. 10,000 shares were purchased over 12 months prior to the announcement, at $4 each, and

ii. a further 10,000 shares were purchased 3 months prior to the announcement, at $4.95.

The cost price of the 20,000 shares is $89,500 ($40,000 plus $49,500).

d. Company A share price after the dividend is announced is $5.00 as they are no longer entitled to the recently announced dividend (that is shares are now trading on an 'ex-dividend' basis).

e. However shares in Company A are also available to be traded on the ASX Special Market (the Special Market) with an entitlement to the dividend (that is trading on a 'cum-dividend' basis). The shares traded on the Special Market have a trading price of $5.17.

f. After the dividends are declared by Company A, you:

iii. sell 20,000 Company A shares on an ex-dividend basis at $5 each share ($100,000), and

iv. on the same day you sold your Company A shares, you purchase on the Special Market 20,000 Company A shares on a cum-dividend basis at $5.17 each share ($103,400).

The result of the above transactions is (excluding any brokerage fees):

a. The dividend amount you received on the 20,000 Company A shares you sold on an ex-dividend basis is $2,800 with franking credits of $1,200.

b. The dividend amount you received on the 20,000 Company A shares you purchased on a cum-dividend basis is $2,800 with franking credits of $1,200.

c. You made a gross capital gain of $10,500 (the difference between the cost of the initial purchases totalling $89,500 and the proceeds received for shares sold on ex-dividend basis $100,000).

d. In order to obtain additional dividends of $2,800 with additional franking credits of $1,200 you incurred a cost of $3,400 (difference between the consideration received from the ex-dividend trade $100,000 and amount paid for the cum-dividend trade $103,400).

e. Without the additional franking credit, the trades undertaken would result in a loss of $600 ($2,800 - $3,400).

f. After undertaking the above trade the Super Fund still holds the same number of shares in Company A, that is 20,000 shares.

Other relevant matters

The Super Fund is not required to make a 'related payment' and will not make any 'related payments' in relation to the dividends.

Assumptions

1. The Company A shares will be held at risk for at least 45 days before they are disposed.

2. You will have a 'net position' of at least 30% of the risks and opportunities in respect of all Company A shares held by the Super Fund.

3. There are no days on which the Super Fund will have materially diminished risk of loss or opportunities for gain in respect of the Company A shares.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 44

Income Tax Assessment Act 1936 section 128B

Income Tax Assessment Act 1936 section 177D

Income Tax Assessment Act 1936 section 177EA

Income Tax Assessment Act 1936 former section 160APHI

Income Tax Assessment Act 1997 section 67-10

Income Tax Assessment Act 1997 section 67-25

Income Tax Assessment Act 1997 section 204-30

Income Tax Assessment Act 1997 section 207-35

Income Tax Assessment Act 1997 section 207-145

Income Tax Assessment Act 1997 Subdivision 207-A

Income Tax Assessment Act 1997 Subdivision 207-B

Income Tax Assessment Act 1997 section 210-170

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Application of Division 207 of the ITAA 1997

The general rule in relation to the receipt of franked dividends as set out in Subdivision 207-A of the Income Tax Assessment Act 1997 (ITAA 1997) is that for the income year in which the distribution is made, the recipient of a franked distribution:

§ includes in their assessable income the amount of the franking credit on the distribution. This is in addition to any other amount included in the recipient's assessable income in relation to the distribution itself (i.e. in addition to the amount of the dividend itself under section 44 of the ITAA 1936.

§ is entitled to a tax offset equal to the franking credit.

Subdivision 207-B of the ITAA 1997 contains special rules for dividends received by an interposed entity. In the case of a superannuation fund, the rules generally state that the trustee will include the amount of the dividend, grossed up by the amount of the franking credit, and will be entitled to the tax offset equal to the franking credit.

Where the total tax offsets exceeds the income tax liability then a refund may be paid where the tax offset is subject to the refundable tax offset rules (refer to section 67-10 of the ITAA 1997). Tax offsets available under Division 207 are subject to the refundable tax offset rules, unless specifically excluded by section 67-25 of the ITAA 1997 (section 67-25 of the ITAA 1997). None of the exclusions in section 67-25 apply to your circumstance.

However, the effect of these general rule is nullified by the operation of section 207-145 of Subdivision 207-F of the ITAA 1997. If a franked distribution is made to an entity in one or more of the circumstances outlined in that section, then that entity will not include the franking credit on distribution in its assessable income and is not entitled to a tax offset because of the distribution.

Pursuant to paragraph 207-145(1)(b) of the ITAA 1997, one of the circumstances in which this can happen is if the Commissioner has made a determination under paragraph 177EA(5)(b) of the ITAA 1936 that no imputation benefit is to arise in respect of a franked distribution.

Detailed reasoning

Application of Division 207 of the ITAA 1997

The general rule in relation to the receipt of franked dividends as set out in Subdivision 207-A of the Income Tax Assessment Act 1997 (ITAA 1997) is that for the income year in which the distribution is made, the recipient of a franked distribution:

§ includes in their assessable income the amount of the franking credit on the distribution. This is in addition to any other amount included in the recipient's assessable income in relation to the distribution itself (i.e. in addition to the amount of the dividend itself under section 44 of the ITAA 1936.

§ is entitled to a tax offset equal to the franking credit.

Subdivision 207-B of the ITAA 1997 contains special rules for dividends received by an interposed entity. In the case of a superannuation fund, the rules generally state that the trustee will include the amount of the dividend, grossed up by the amount of the franking credit, and will be entitled to the tax offset equal to the franking credit.

Where the total tax offsets exceeds the income tax liability then a refund may be paid where the tax offset is subject to the refundable tax offset rules (refer to section 67-10 of the ITAA 1997). Tax offsets available under Division 207 are subject to the refundable tax offset rules, unless specifically excluded by section 67-25 of the ITAA 1997. None of the exclusions in section 67-25 applies to your circumstance.

However, the effect of these general rule is nullified by the operation of section 207-145 of Subdivision 207-F of the ITAA 1997. If a franked distribution is made to an entity in one or more of the circumstances outlined in that section, then that entity will not include the franking credit on distribution in its assessable income and is not entitled to a tax offset because of the distribution.

Pursuant to paragraph 207-145(1)(b) of the ITAA 1997, one of the circumstances in which this can happen is if the Commissioner has made a determination under paragraph 177EA(5)(b) of the ITAA 1936 that no imputation benefit is to arise in respect of a franked distribution.

General anti-avoidance rule and the application of section 177EA of the ITAA 1936

Section 177EA of the ITAA 1936 is a general anti-avoidance rule that safeguards the operation of the imputation system. The purpose of section 177EA is to protect the imputation system from abuse and ensure that the benefits of the imputation system flow to the economic owner of the share which is the source of the franked distribution. Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 3) 1998 (Explanatory Memorandum) that accompanied the introduction of section 177EA further explains that:

8.5 Two of the underlying principles of the imputation system are, firstly, that the benefits of imputation should only be available to the true economic owners of shares, and only to the extent that those taxpayers are able to use the franking credits themselves and, secondly, that tax paid at the company level is in broad terms imputed to shareholders proportionately to their shareholdings.

8.6 Franking credit trading schemes allow franking credits to be inappropriately transferred by, for example, allowing the full value of franking credits to be accessed without bearing the economic risk of holding the shares. These schemes undermine the first principle.

8.7 Companies can also engage in dividend streaming (i.e. the distribution of franking credits to select shareholders), which undermines the second principle by attributing tax paid on behalf of all shareholders to only some of them. Generally this entails the streaming of franking credits to taxable residents and away from non-residents and tax-exempts.

8.8 The Bill introduces a general anti-avoidance rule and anti-streaming measures to restore these underlying principles of the imputation system.

Section 177EA of the ITAA 1936 can apply where a relevant taxpayer would receive or could reasonably be expected to receive an imputation benefit, and other conditions specified in subsection 177EA(3) of the ITAA 1936 are satisfied. Where these conditions are satisfied, the Commissioner may make a determination under subsection 177EA(5) of the ITAA 1936 with the effect of either:

· denying the imputation benefit on the distribution that is made, or that flows indirectly, to the relevant taxpayer; or

· imposing franking debits or exempting debits on the distributing entity franking account.

Section 177EA of the ITAA 1936 will apply if the following conditions in subsection 177EA(3) of the ITAA 1936 are satisfied:

(a) there is a scheme for a disposition of membership interests, or an interest in membership interests, in a corporate tax entity; and

(b) either:

(i) a frankable distribution has been paid, or is payable or expected to be payable, to a person in respect of the membership interests; or

(ii) a frankable distribution has flowed indirectly, or flows indirectly or is expected to flow indirectly, to a person in respect of the interest in membership interests, as the case may be; and

(c) the distribution was, or is expected to be, a franked distribution or a distribution franked with an exempting credit; and

(d) except for this section, the person (the relevant taxpayer) would receive, or could reasonably be expected to receive, imputation benefits as a result of the distribution; and

(e) having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling the relevant taxpayer to obtain an imputation benefit.

The application of each of the above paragraphs in subsection 177EA(3) of the ITAA 1936 to a particular scheme depends upon a careful weighing of all the relevant facts and surrounding circumstances. Each of the conditions in paragraphs 177EA(3)(a) to 177EA(3)(d) of the ITAA 1936 is considered below.

Paragraph 177EA(3)(a) There is a scheme for a disposition of membership interests

The term 'scheme for a disposition' is defined in subsection 177EA(14) of the ITAA 1936. The term has an inclusive meaning by reference to a scheme that involves any of the matters set out in paragraphs 177EA(14)(a) to 177EA(14)(f) of the ITAA 1936. In particular, paragraph 177EA(14)(b) of the ITAA 1936 includes a scheme that involves entering into any contract, arrangement, transaction or dealing that changes or otherwise affects the legal or equitable ownership of the membership interests or interest in membership interests.

In your case, the purchase of the 'replacement' Company A shares ('cum-dividend' shares') on the Special Market on the same day that you disposed of the same number of shares in that Company on an ex-dividend basis constitutes a 'scheme for a disposition' of membership interests as the legal ownership of the shares in question has changed. Paragraph 177EA(3)(a) of the ITAA 1936 is thus satisfied.

Paragraph 177EA(3)(b) A frankable dividend is paid in respect of the membership interests

You are able to receive dividends and associated franking credits in respect of Company A shares. Your first entitlement to receive franked dividends occurs in respect of the membership interests the Super Fund has in the Company A shares that are sold on an ex-dividend basis. The purchase of further shares in the same company on the Special Market, on a cum-dividend basis, also entitles you to additional franked dividends. Paragraph 177EA(3)(b) of the ITAA 1936 is satisfied as a frankable distribution has been paid to you, as trustee of the Super Fund, in respect of the relevant shares.

Paragraph 177EA(3)(c) The distribution was, or is expected to be, a franked distribution

In the present case a dividend of 14 cents per share is paid for each Company A share and the dividend is fully franked.

Paragraph 177EA(3)(d) The relevant taxpayer would receive or could reasonably be expected to receive, an imputation benefit as a result of the distribution

Subsection 177EA(2) of the ITAA 1936 provides that any expression used in section 177EA of the ITAA 1936 that is defined in the ITAA 1997 has the same meaning as in the ITAA 1936. Subsection 995-1(1) of the ITAA 1997 provides that 'imputation benefit' has the meaning given by subsection 204-30(6) of the ITAA 1997.

Subsection 204-30(6) of the ITAA 1997 provides that a member of an entity receives an imputation benefit as a result of a distribution if:

(a) the member is entitled to a tax offset under Division 207 of the ITAA 1997 as a result of the distribution; or

(b) an amount would be included in the member's assessable income as a result of the distribution because of the operation of section 207-35 of the ITAA 1997; or

(c) a franking credit would arise in the franking account of the member as a result of the distribution; or

(d) an exempting credit would arise in the exempting account of the member as a result of the distribution; or

(e) the member would not be liable to pay withholding tax on the distribution, because of the operation of paragraph 128B(3)(ga) of the ITAA 1936, or

(f) the member is entitled to a tax offset under section 210-170 of the ITAA 1997 as a result of the distribution.

With respect to the distributions received on all shares in Company A, it is accepted that you, as trustee of the Super Fund, will include the amount of the dividend in its assessable income, grossed up by the amount of the imputation credit. Further, absent the operation of 177EA of the ITAA, the Super Fund is entitled to claim the imputation benefit in respect of the distributions. This condition is therefore satisfied.

Paragraph 177EA(3)(e) The scheme is entered into for a purpose of enabling the relevant taxpayer to obtain an imputation benefit

Paragraph 177EA(3)(e) of the ITAA 1936 requires a conclusion, having regard to the 'relevant circumstances' of the scheme, that the person, or one of the persons who entered into or carried out the scheme or any part of the scheme, did so for a purpose of enabling the relevant taxpayer to obtain an imputation benefit. The purpose does not need to be the dominant purpose, but it must be more than an incidental purpose.

Subsection 177EA(17) of the ITAA 1936 provides the 'relevant circumstances' that are to be considered in drawing any conclusion of purpose, including the eight factors listed in subsection 177D(2) of the ITAA 1936. However, subsection 177EA(17) does not provide an exhaustive list of relevant circumstances.

The matters listed in subsection 177EA(17) of the ITAA 1997 will now be considered as they relate to your situation.

Paragraph 177EA(17)(a)

Paragraph 177EA(17)(a) of the ITAA 1936 refers to the extent and duration of the risks of loss and the opportunities for profit from holding the Company A shares.

The Super Fund's exposure to the relevant Company A shares over the course of the arrangement effectively constitutes an exposure to a single parcel of 10,000 Company A shares. This group of shares are sold (the ex-dividend shares) and repurchased (the cum-dividend shares) on the same day such that the Super Fund is only exposed to price movements for 10,000 shares. Conversely, the nature of the arrangement allows the Super Fund to benefit from the dividend and associated franking credits in respect of 20,000 shares. This offends one of the basic tenets of the imputation system as provided in the Explanatory Memorandum that accompanied the introduction of section 177EA of the ITAA 1936, which states that the benefits of imputation should only be available to the true economic owners of shares.

Generally, the greater the risk borne by the taxpayer receiving the franking credit benefit, the less likely it is that the requisite purpose in paragraph 177EA(3)(e) of the ITAA 1936 is present (paragraph 8.82 of the Explanatory Memorandum).

In the present circumstances it is considered that a scheme which effectively exposes you to the risks of ownership on a single parcel of Company A shares, whilst actually obtaining imputation benefits in respect of two parcels of the said shares, points heavily towards a conclusion as to the existence of the requisite purpose.

Accordingly, this matter supports a finding of the requisite purpose under paragraph 177EA(3)(e) of the ITAA 1936.

Paragraph 177EA(17)(b)

Paragraph 177EA(17)(b) of the ITAA 1936 refers to whether the relevant taxpayer would, in the year of income in which the distribution is made, derive a greater benefit from franking credits than other entities who hold membership interests in the company.

The Super fund is a superannuation entity which is subject to an ordinary tax rate of 15%. The expression 'greater benefit from franking credits' is defined in section 995-1 of the ITAA 1997 as having a meaning affected by subsections 204-30(7) and 204-30(8) of the ITAA 1997. These subsections provide that a favoured member of an entity derives a greater benefit from franking credits if the other member is a foreign resident.

Whilst the arrangement takes place on a public exchange and it is thus difficult to identify the seller of the cum-dividend shares, it is considered that the only rationale that would lead to a supply of cum-dividend shares in the Special Market is from investors or entities who are unable to utilise the impending receipt of imputation benefits under the applicable provisions of the income tax laws, and those investors or entities were inadvertently or otherwise not in a position to dispose of their shares prior to the shares becoming 'ex-dividend'. Further, such investors who sell their shares on a cum-dividend basis may be able to realise a slightly higher sale price on the Special Market which may be due to the value of franking credits that will be attached to the announced dividend.

In this context, it is considered that a significant source of the cum-dividend shares would be non-resident holders. The reasons for this are:

(a) they are generally only able to derive a limited advantage from the receipt of an imputation credit, and

(b) they are also generally not subject to Australian capital gains tax on the disposal of a publicly listed share.

Further, as the Super Fund is an entity taxed at a rate of 15% it receives a refundable tax offset for franking credits at the rate of 30% for fully franked dividends. Therefore the Super Fund would derive a greater benefit from franking credits than a non-resident holder who sold their shares on the cum-dividend market. Accordingly paragraph 177EA(17)(b) of the ITAA 1936 is satisfied.

Paragraph 177EA(17)(c)

Paragraph 177EA(17)(c) of the ITAA 1936 refers to whether, apart from the scheme, the corporate tax entity would have retained the franking credits or exempting credits or would have used the franking credits or exempting credits to pay a franked distribution to another entity referred to in paragraph (b).

In the present case, the arrangement is not considered likely to influence the behaviour of the corporate tax entity making the franked distribution. Thus this relevant circumstance is not indicative as to the existence of the relevant purpose.

Paragraph 177EA(17)(d)

Paragraph 177EA(17)(d) of the ITAA 1936 refers to whether, apart from the scheme, a franked distribution would have flowed indirectly to another entity referred to in paragraph 177EA(17)(b). Again, there is no evidence to suggest that a franked distribution would have flowed indirectly to another entity.

Thus as with paragraph 177EA(17)(c) of the ITAA 1936, the matter in paragraph 177EA(17)(d) does not point towards the requisite purpose.

Paragraph 177EA(17)(e)

Paragraph 177EA(17)(e) of the ITAA 1936 states:

if the scheme involves the issue of a non-share equity interest to which section 215-10 of the Income Tax Assessment Act 1997 applies - whether the corporate tax entity has issued, or is likely to issue, equity interests in the corporate tax entity:

(i) that are similar, from a commercial point of view, to the non-share equity interest; and
(ii) distributions in respect of which are frankable.

As the arrangement does not involve the issue of a non-share equity interest, paragraph 177EA(17)(e) of the ITAA 1936 is not relevant.

Paragraph 177EA(17)(f)

Paragraph 177EA(17)(f) of the ITAA 193 states that it is relevant whether any consideration paid, given or received by or on behalf of the relevant taxpayer was calculated by reference to the imputation benefit to be received by the relevant taxpayer.

According to trades referred to under Relevant facts and circumstances section you, as trustee of the Super Fund, purchased a parcel of Company A shares on a cum-dividend basis on the Special Market for $5.17 (cum-dividend shares). This amount is greater than the amount the Super Fund receives for the sale of the same number of Company Shares (at $5 each) that were ex-dividend even after taking into account the entitlement to the announced dividend (14c); i.e. you paid more for the cum-dividend shares than the sale price of the ex-dividend shares and the value of the announced dividend ($5.17 less $5 less 14c equals 3c).

In this situation, there will be no contract for sale or agreement outlining how the parties have priced the transaction. Rather, you purchased on market for what was considered to be an acceptable price. However, this does not automatically defeat a conclusion that the benefit of the franking credits that will be attached to the announced dividend was not taken into account by you in making the decision to purchase the shares. Viewed objectively, the Super Fund has paid an additional 17c for the cum-dividend shares. The only advantage this additional payment secures is the right to receive the additional dividend and franking credit. In an objective sense, it is unlikely a capital sum of 17c would be outlaid to 'purchase' an income entitlement of 14c. In this regard, it is considered that the consideration given by the Super Fund for the purchase of the Company A shares has taken into account the imputation benefit to be received in its pricing decision. It is only after taking into account the imputation benefit that the pricing of the transaction makes any commercial sense.

Accordingly, the circumstance in paragraph 177EA(17)(f) of the ITAA 1936 points towards the presence of the requisite purpose.

Paragraph 177EA(17)(g)

Paragraph 177EA(17)(g) of the ITAA 1936 refers to whether a deduction is allowable or a capital loss is incurred in connection with a distribution that is made or that flows indirectly under the scheme.

Pursuant to the arrangement, you, as trustee of the Super Fund, acquire the Company A shares on the Special Market. This involves paying consideration for the shares that included a consideration of the value of the dividend as evidenced by the difference in the ex-dividend price and the cum-dividend price. After the dividend has been paid on the cum-dividend shares (or the cum-dividend shares themselves commence trading ex-dividend) the value of the shares will be reduced by the approximate value of the dividend. This may potentially give rise to a capital loss in the future when the Company A shares are disposed. However, it is conceded that such a disposal and realisation of the potential capital loss is not an integral part of the arrangement.

Thus, the consideration in paragraph 177EA(17)(g) of the ITAA 1936 does not indicate a purpose of enabling the relevant taxpayer to obtain an imputation benefit.

Paragraph 177EA(17)(ga)

Paragraph 177EA(17)(ga) of the ITAA 1936 refers to whether a distribution made under the scheme is sourced from unrealised or untaxed profits.

The Super Fund is a passive recipient of a dividend paid. The source of the distribution is not relevant to the present arrangement. Accordingly, this characteristic in paragraph 177EA(17)(ga) of the ITAA 1936 does not indicate a purpose of enabling the Trust to obtain an imputation benefit.

Paragraph 177EA(17)(h)

Paragraph 177EA(17)(h) of the ITAA 1936 refers to whether a distribution that is made or that flows indirectly under the scheme to the relevant taxpayer is equivalent to the receipt by the relevant taxpayer of interest or of an amount in the nature of, or similar to, interest.

The dividends received in the present arrangement are ordinary dividends sourced in the profits of the paying entity. As it would appear that distributions on the relevant shares in substance do not give rise to an interest like return, the matter in paragraph 177EA(17)(h) of the ITAA 1936 does not indicate requisite purpose is present.

Paragraph 177EA(17)(i)

Paragraph 177EA(17)(i) refers to the period for which the relevant taxpayer held membership interests, or had an interest in membership interests in the corporate tax entity.

If the present arrangement is pursued on a regular basis, it is likely that shares will be held for a period of six months. At the end of this period legal ownership of ex-dividend shares will again be exchanged for legal ownership of the same number of cum-dividend shares. To a certain extent, such relatively short term trades are inconsistent with the long term nature of superannuation fund investing; however the ultimate exposure of the fund to the underlying share does not change in the long term. In simple terms, in the present situation, the fund would be exposed to 10,000 Company A shares in the long term, it would just be different Company A shares every six months. This 'churning' would be suggestive of a transaction motivated by something other than long term investment objectives. However, the Super Fund would be exposed to market movements for the 10,000 shares.

Paragraph 177EA(17)(j)

This paragraph requires an examination of any matters referred to in subsection 177D(2) of the ITAA 1936:

(a) the manner in which the scheme was entered into or carried out;

(b) the form and substance of the scheme;

(c) the time at which the scheme was entered into and the length of the period during which the scheme was carried out;

(d) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;

(e) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;

(f) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;

(g) any other consequence for the relevant taxpayer, or for any person referred to in paragraph (f), of the scheme having been entered into or carried out;

(h) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in paragraph (f).

Of these factors paragraphs 177D(2)(a) to 177D(2)(e) of the ITAA 1936 are considered the most relevant.

Paragraph 177D(2)(a)

In the context of former subparagraph 177D(b)(i) of the ITAA 1936, the High Court said in FCT v. Spotless Services (1996) 34 ATR 183 at 191; 96 ATC 5201 at 96 ATC 5209 that:

the terms ``manner'' and ``entered into'' are not given any restricted meaning. ``Manner'' includes consideration of the way in which and method or procedure by which the particular scheme in question was established.

Whilst the trades take place on the ASX, the purchase of the cum-dividend shares does not take place on the ordinary market. In the ordinary course of trading on the ASX the terms cum-dividend and ex-dividend are mutually exclusive in the sense that a share is cum-dividend until it goes ex-dividend. It is only in a 'Special Market' that a share can be acquired cum-dividend after the ex-dividend date.

Thus, the manner in which the trades takes place on the Special Market would suggest that you sourcing the imputation benefit is indicative that tax considerations are a considerable driver as opposed to being just an ordinary trade.

It is considered that the manner in which the scheme is entered into is indicative of the requisite purpose.

Paragraph 177D(2)(b)

In respect of former subparagraph 177D(b)(ii), Callinan J stated in Federal Commissioner of Taxation v. Hart (2004) ATC 4599 at 2004 ATC 4625:

The reference in s177D(b)(ii) to the 'substance of the scheme' invites attention to what in fact the taxpayer may achieve by carrying it out, that is to matters whether forming part of, or not to be found within the four corners of an agreement or an arrangement. They also require that substance rather than form be the focus.

In your case, the substance of the arrangement is that the Super Fund has a continuing investment in Company A constituted by the original ex-dividend shares and the exact same number of replacement cum-dividend shares; i.e. in substance the Super Fund holds 10,000 shares in Company A. By way of contrast, the legal form of the arrangement is for the Super Fund to hold 20,000 Company A shares in two different parcels, with both parcels conferring an entitlement to dividends and franking credits. This disparity between the form and substance of the scheme is indicative of the requisite purpose.

Paragraph 177D(2)(c)

The timing of the scheme is very precise. The scheme can only be achieved on the days when the ASX allows the Special Market to operate, such that shares can be sold ex-dividend in the ordinary market and purchased cum-dividend on the Special Market. To purchase the shares earlier would involve double the outlay of capital (in that you would have to remain the owner of the ex-dividend shares whilst purchasing the cum-dividend shares). Further, if a taxpayer owned both parcels of shares at the same time and then disposed of the ex-dividend shares, the application of the 'last-in first-out' rule in former section 160APHI of the ITAA 1936 would mean that the taxpayer would not be capable of being treated as a qualified person in respect of the cum-dividend shares, which they would be taken to have disposed for the purposes of the holding period rule.

Paragraph 177D(2)(d)

With respect to paragraph 177D(2)(d) of the ITAA 1936, but for section 177EA of Part IVA of the ITAA 1936, it is likely that the Super Fund would receive a refundable tax offset in respect of the dividends received on all the Company A shares.

Subparagraph 177D(2)(e)

With respect to paragraph 177D(2)(e) of the ITAA 1936, the financial position of the Super Fund will be improved through the receipt of the refundable tax offsets.

Subparagraphs 177D(2)(f) to 177D(2)(h)

The remaining circumstances in subsection 177D(2) are not considered relevant in the present matter.

Conclusion

As stated, the matters listed in subsection 177EA(17) of the ITAA 1936 are not exhaustive of the 'relevant circumstances' which would support a conclusion that the requisite purpose of obtaining an imputation benefit existed. Further, paragraph 177EA(3)(e) of the ITAA 1936 does not require a conclusion that the dominant purpose was to obtain imputation benefits. It will be sufficient that, having regard to all relevant circumstances, the investor or one of the persons who entered into or carried out the scheme (including the Super Fund) did so for a purpose (other than an incidental purpose) of enabling the Super Fund to obtain an imputation benefit. Further, it is not necessary that all of the factors listed in subsection 177EA(17) of the ITAA 1936 or subsection 177D(2) of the ITAA 1936 be relevant to the scheme. The "overwhelming weight" of one factor alone may be sufficiently significant to form a conclusion as to purpose.

Overall, it is considered that based on the information provided, a reasonable person would conclude, after considering all the relevant circumstances, that the purpose of the scheme of enabling the Super Fund to obtain imputation benefits was more than incidental. The trade would make no sense if the tax considerations were not present. Whilst a counterfactual analysis is not necessary, it is considered that the only counterfactual would be to maintain ownership of the ex-dividend shares. This is what is achieved by the strategy in economic terms when a taxpayer strips away the franking credit benefit.

Therefore, on balance, the conditions of section 177EA of the ITAA 1936 are satisfied and consequently the anti-avoidance provisions apply to the arrangement. Thus, the Commissioner would make a determination pursuant to paragraph 177EA(5)(b) of the ITAA that no imputation benefit is to arise in respect of the franked dividend paid in respect of the relevant shares purchased by the Super Fund on a cum-dividend basis on the Special Market under the arrangement (second parcel of shares). The effect of such a determination would be that you would not obtain a refund for the tax offset in relation to the franking credits received in respect of the second parcel of shares pursuant to subsection 207-145(1) of the ITAA 1997.

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