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Edited version of private ruling
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Ruling
Subject: Ex dividend date
Question 1
If a share is purchased on the Australian Securities Exchange (ASX) with an entitlement to receive a dividend (cum dividend basis), then does it follow that for the purposes of subsection 160APHE(1) of the Income Tax Assessment Act 1936 (ITAA 1936) the share purchased necessarily becomes ex dividend on a date which is on or after the date of purchase?
Advice/Answers
Where shares are purchased on a cum dividend basis, the ex dividend date must occur after the date of purchase.
Question 2
If a share is sold on ASX without an entitlement to receive a dividend (ex dividend basis), then does it follow that for the purposes of subsection 160APHE(1) of the ITAA 1936 the share sold became ex dividend on a date which is before the date of sale?
Advice/Answers
Where shares are sold on an ex dividend basis, then the ex dividend date must occur either on or before the date of sale.
This ruling applies for the following period
Financial year ended 30 June 2011.
The scheme commenced on
1 July 2010.
Relevant facts
The taxpayer owned fully paid ordinary shares in companies listed on the ASX, as well as a number of other listed and unlisted shares and securities.
The taxpayer received fully franked dividend in relation to the above mentioned shares.
The taxpayer also conducted a business of trading in securities, both shares and options, including, but not limited to, trading in securities issued by companies listed on the ASX and options over those securities.
Relevant legislative provisions
Income Tax Assessment Act 1936 section 160APHD
Income Tax Assessment Act 1936 subsection 160APHE(1)
Income Tax Assessment Act 1997 paragraph 204-175(1)(a)
Reasons for decision
Question 1
Summary
Where shares are purchased with an entitlement to receive a dividend, then the ex dividend date necessarily occurs after the date of purchase.
Detailed reasoning
Paragraph 207-145(1)(a) of the ITAA 1997
Subdivision 207-F of the Income Tax Assessment Act 1997 (ITAA 1997) generally denies a taxpayer from a gross-up or tax offset where the imputation has been manipulated. Manipulation, under paragraph 207-145(1)(a) of the ITAA 1997, includes instances where the entity receiving the franked distribution is not a 'qualified person in relation to the distribution for the purposes of Division 1A of former Part IIIAA of the Income Tax Assessment Act 1936 (ITAA 1936)'. Essentially, if a franked distribution is made to the taxpayer and they are not a qualified person the franking credit attached to the distribution could not be included in their assessable income and are therefore not entitled to the corresponding tax offset. Therefore a consideration of the former division is necessary to determine who is considered a qualified person.
Qualified person and the primary qualification period
The definition of a qualified person is outlined in subsection 160APHO(1) of the ITAA 1936 and generally states that you would be a qualified person if, among other things, you held the shares for a continuous period of at least 45 days during the primary qualification period (or 90 days if the shares are preference shares).
The primary qualification period is defined under section 160APHD of the ITAA 1936 as ending on the 45th day after the day on which the shares became ex dividend (or 90 days if the shares are preference shares).
The same test is applied for interests in shares. Therefore, consideration must be given as to the ex dividend date.
Ex dividend date
The meaning of ex dividend is provided under subsection 160APHE(1) of the ITAA 1936 as being
A share in respect of which a dividend is to be paid, or an interest (other than an interest as a beneficiary of a widely held trust) in such a share, becomes ex dividend on the day after the last day on which the acquisition by a person of the share will entitle the person to receive the dividend.
That being that the ex dividend date is the day after the last day of entitlement to receive a dividend.
The application of this rule is illustrated in the Explanatory Memorandum to the Taxation Laws Amendment Bill (No.2) of 1999 (Cth). It explained that, as an example, if a company declares a dividend on 1 June, to be paid on 30 June, and the dividend can be paid to shareholder who held shares up until 25 June (but no later), then the ex-dividend day is 26 June.
Being such that the ex dividend date occurs on the day after the last day of entitlement to receive a dividend, it follows that the date of purchase of a share with an entitlement attached (cum dividend basis) will occur before the ex dividend date.
The purchase of a share with an entitlement to a dividend cannot occur on the ex dividend date as the date for entitlement will have passed. For entitlement to pass the ex dividend date must occur after the date of purchase.
Therefore, any shares the taxpayer has purchased with an entitlement to a dividend will have occurred before the relevant ex dividend date for the purposes of determining their primary qualification period in relation to the holding period.
Question 2
Summary
Where shares are sold on the ASX on an ex dividend basis, it must be such that the date the share became ex dividend is on or before the date of sale.
Detailed reasoning
Ex dividend date
Consideration of this issue follows the same reasoning and references as the previous question.
When share is sold on an ex dividend basis under the ASX the seller retains the entitlement to the current dividend on the share while passing on the interest in the share itself. Subsequently if no entitlement to the dividend passes, then the ex dividend date must be on or before the date of sale.
Therefore, shares the taxpayer has purchased on an ex dividend basis will have occurred after the ex dividend date for the purposes of determining their primary qualification period in relation to the holding period.