Edited version of private ruling

Authorisation Number: 1011739589879

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Ruling

Subject: Shares of connected persons constituting a group

Question

Can shares which are not connected persons at the same time constitute part of a group of securities for the purpose of subsection 160APHI(4) the former Division 1A of former Part IIIAA of the Income Tax Assessment Act 1936 (ITAA 1936)?

Advice/Answers

No.

This ruling applies for the following period

Financial year ended 30 June 2011

Financial year ended 30 June 2012

Financial year ended 30 June 2013

Financial year ended 30 June 2014

Financial year ended 30 June 2015

Relevant facts

The taxpayer currently owns 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 receives fully franked dividend in relation to the above mentioned shares.

The taxpayer also conducts 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;

The taxpayer has indicated that they also own shares in a number of other private companies which includes the trustee of their superannuation fund. They have subsequently claimed that the trustee would be considered a connected person for the purposes of subsection 160APHI(4) of the ITAA 1936.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 160APHI(2)

Income Tax Assessment Act 1936 subsection 160APHI(3)

Income Tax Assessment Act 1936 subsection 160APHI(4)

Income Tax Assessment Act 1997 paragraph 204-175(1)(a)

Reasons for decision

Summary

Shares which can constitute part of a group of securities for the purpose of subsection 160APHI(4) of the ITAA 1936 can only be held by a connected person. Where the connected persons do not hold the related securities at a particular time with the primary securities, there are no group of securities for the purposes of the section.

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 the 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 taxpayer 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 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 they are therefore not entitled to the corresponding tax offset. Therefore a consideration of the former division is necessary.

Related securities of a connected person

Subsection 160APHI(4) of the ITAA 1936 outlines that related securities are to be taken to be disposed of on a last-in first-out basis. It states that:

All related securities held by connected persons at a particular time constitute a group of securities for the purposes of this section and, subject to subsections (5), (6) and (7), any disposals of securities in the group that were effected by any connected persons during the qualification period are to be taken, in the order in which they occurred, as having been disposals on a last-in first-out basis, that is to say, as having been:

(a) first, disposals of the latest securities in the group to be acquired by any of the connected persons; and

(b) secondly, disposals of the next latest securities in the group to be so acquired, and so on.

The subsection requires that only 'related securities held by connected persons at particular time constitute a group of securities'. Related securities is defined under subsection 160APHI(2) of the ITAA 1936 and states that the securities are related where they are held by connected persons and are substantially identical securities to the primary securities where an entitlement of a franked dividend/distribution is held. Therefore any securities held by the trustee of the superannuation fund must be substantially identical to shares held in the companies listed on the ASX or other securities to constitute part of a group of securities.

The definition of a connected person is found under subsection 160APHI(3) of the ITAA 1936 which provides that a connected persons is:

(a) the taxpayer;

(b) if, at a time during the qualification period, an associate of the taxpayer, under an arrangement to which they were parties, disposed of shares or an interest in shares - the associate;

Associate is further defined in section 318 of the ITAA 1936. In relation to a natural person, associate includes a trustee of a trust where the person benefits under the trust. The taxpayer is a beneficiary of the superannuation fund (a trust) and as such benefits under that trust. Therefore, the taxpayer and the trustee of their superannuation fund are associates and, consequently, connected persons for the purpose of section 160APHI of the ITAA 1936.

At a particular time

Subsection 160APHI(4) of the ITAA 1936 state that the securities must be held 'at a particular time'.

It follows that if at no particular time do the connected persons hold the primary securities and the related securities together, that no group of securities can be formed for the purposes of that subsection.

Therefore, where the taxpayer and/or the trustee of the superannuation fund do not continuously hold related securities at a particular time, regardless of whether the securities were substantially identical, then there cannot be a group of securities for the purposes of subsection 160APHI(4) of the ITAA 1936.

Conversely, if the trustee of the superannuation fund and the taxpayer were to hold related securities concurrently at a particular time then that could be considered a group of securities.