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Ruling

Subject: Holding period rule

Question 1

When does a taxpayer who purchases shares on the Australian Stock Exchange (ASX) begin holding those shares for the purposes of:

· the former Division 1A of former Part IIIAA of the Income Tax Assessment Act 1936 (ITAA 1936); and

· the former section 160APHO of the ITAA 1936?

Advice/Answers

A taxpayer begins holding the shares the day after they have entered the contract to acquire those shares.

Question 2

When does a taxpayer who sells shares on the ASX cease holding those shares for purposes of:

· the former Division 1A of former Part IIIAA of the Income Tax Assessment Act 1936; and

· the former section 160APHO of the ITAA 1936?

Advice/Answers

A taxpayer ceases to hold the shares the day before they have entered the contract to dispose of those shares.

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.

You also conduct a business of trading in securities, both shares and options, including, but not limited to, trading in securities issued by the companies listed on the ASX and options over those securities.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 160APHH(1)

Income Tax Assessment Act 1936 section 160APHO

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

Reasons for decision

Question 1

Summary

A taxpayer begins to hold shares for the purpose of former Division 1A of former Part IIIAA of the ITAA 1936 the day after they enter into an unconditional contract at a fixed price to purchase the shares (the acquisition date).

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 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 they 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.

Holding for the purpose of the holding period rule

The holding period required for the determination of a qualified person is outlined in subsection 160APHO(2) of the ITAA 1936 which requires the taxpayer to hold the shares for a continuous period, not counting the day on which the taxpayer acquired or disposed of the shares.

The day when shares are acquired or disposed of are provided for in subsection 160APHH(1) of the ITAA 1936 which outlines that:

If:

(a) a taxpayer acquires or disposes of shares, or an interest in shares, under a contract; and

(b) the price payable for the acquisition or disposal is fixed under the contract; and

(c) either of the following applies:

(i) the contract is unconditional;

(ii) the contract is subject to a condition being complied with before the contract takes effect and the condition has been complied with;

the taxpayer is taken, for the purposes of this Division, to have acquired or disposed of, as the case may be, the shares, or the interest, at the time of the making of the contract.

It states that the time of acquisition or disposal of a share is determined at the time of making an unconditional contract for a fixed price. It also allows for conditional contracts to be the date of acquisition or disposal where the conditions have been complied with prior to the contract taking effect.

Therefore, if the taxpayer were to purchase shares or an interest in shares, the time of acquisition would be at the time they entered into an unconditional contract for a fixed price.

This is because at the time of acquisition or disposal, the taxpayer will assume or relinquish the risks and opportunities of share ownership once he or she has an unconditional right and obligation to buy shares at a fixed price (see Explanatory Memorandum to the Taxation Laws Amendment Bill (No.2) of 1999 (Cth)) (EM).

This would not be true if the share price could change: for example, a contract to buy shares at the market price on a future day would leave risk with the seller until then (see the EM).

In terms of settlement and clearing for the purposes of the ASX share transfer, subsection 160APHH(1) of the ITAA 1936 states that acquisition will occur at the 'time of making' of the contract. As settlement is the processes of completing the contract as opposed to the 'time of making' of the contract, for the purposes of acquisition the relevant date would be the date the transaction was entered into. This is consistent with the EM as the risks and opportunities of share ownership will have passed at this time.

Therefore, where the taxpayer purchased shares at a particular date (T) subject to a 3 day settlement period (T+3), the relevant date that the shares were acquired would be on the transaction date (T). As subsection 160APHO(2) of the ITAA 1936 states that holding does not include the date of acquisition, the relevant holding period would begin the day after the transaction date (T).

Question 2

Summary

A taxpayer ceases to hold shares for the purpose of Division 1A of former Part IIIAA of the ITAA 1936 the day before they enter into an unconditional contract at a fixed price to sell the shares.

Detailed reasoning

Holding for the purpose of the holding period rule

Following from the reasoning above, if the taxpayer were to enter an unconditional contract for the disposal of their shares or interest in shares at a fixed price, then they are deemed to cease holding those shares or interest at the day before the date of disposal.

Whereby shares are sold on the ASX subject to a settlement period, the relevant date of disposal is the date the contract was entered into as the risks and opportunities of share ownership will no longer be retained by the seller. As subsection 160APHO(2) of the ITAA 1936 states that holding does not include the date of disposal, the relevant holding period would end the day before the transaction date (T).