Edited version of private ruling

Authorisation Number: 1011841298132

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Share buy-back/wash sale

Question 1

Does Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply, to the circumstances described, under the provisions of the "wash sales" arrangements in TR 2008/1 or any other provisions?

Answer

No

Question 2

In the event that the fund was in accumulation mode (rather than in pension mode), would the answer to question 1 be any different - given that although the total economic benefit to the fund would be reduced (as the grossed up dividend would be taxed at 15%) the capital loss component would be available to offset against either current or future capital gains?

Answer

Invalid as this situation does not apply to this taxpayer

Question 3

Are the answers in 1 and 2 affected by the time period between accepting the buy-back offer and purchasing "replacement shares on the market - for example, 6 months later or 12 months later?

Answer

This ruling applies for the following period:

Financial year ended 30 June 2011.

The scheme commences on:

1 July 2010.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The taxpayer is a regulated superannuation fund in 100% pension mode.

The fund has a portfolio of share investments including shares in BHP Billiton Limited.

BHP recently announced an off-market buy back offer. The basis of the offer is that BHP will buy back shares for a discount on the current market price. The component parts of the payment for the shares will be mainly a fully franked dividend component plus a small capital component. The exact price will depend on the market and the number of shareholders who offer their shares for buy-back. The details of the offer are set out in the Off Market Buy-Back Booklet.

Page 24 of the booklet gives an example using an assumed buy back price of $38.70 (being estimated market price of $45 less 14% discount) consisting of a fully franked dividend of $38.42 and a capital component of $0.28. Applying this example to the taxpayer's situation means that the fund would receive $77,400 for the shares. There would be a franking credit applicable of $32,931 which would be accessible when the 2011 tax return is assessed, giving total proceeds from the sale of $110,331. This compares to $90,000 if the shares were sold on the market at $45 - ie a 22.5% increase in value. The capital loss on the shares would be $67,332 (calculated at sale price $0.28 + excess tax value over buy-back of $6.30 x 2,000 shares = $13,160 minus cost base of $80,492).

The fund has taken up the buy-back offer and subsequent to the return of funds is considering buying BHP shares on the market in the near term.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 Part IX

Income Tax Assessment Act 1936 section 44

Income Tax Assessment Act 1936 section 45B

Income Tax Assessment Act 1936 section 45B(2)(a)

Income Tax Assessment Act 1936 section 45B(2)(b)

Income Tax Assessment Act 1936 section 45C

Income Tax Assessment Act 1936 section 177A

Income Tax Assessment Act 1936 section 177C

Income Tax Assessment Act 1936 section 177D

Income Tax Assessment Act 1936 section 177D(b)

Income Tax Assessment Act 1936 section 177EA

Income Tax Assessment Act 1936 section 177EA(3)

Income Tax Assessment Act 1936 section 177EA(5)

Income Tax Assessment Act 1936 section 177EA(5)(b)

Income Tax Assessment Act 1936 section 177EA(14)

Income Tax Assessment Act 1936 section 177EA(17)

Income Tax Assessment Act 1936 section 177F(1)

Income Tax Assessment Act 1936 section 282B

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 108-5(2)

Income Tax Assessment Act 1997 Part 3-6

Income Tax Assessment Act 1997 Subdivision 202-E

Income Tax Assessment Act 1997 section 202-5

Income Tax Assessment Act 1997 section 205-15

Income Tax Assessment Act 1997 section 295-385

Reasons for decision

Wash sale - Taxation Ruling TR 2008/1

Share transfer arrangements that are intended to generate or realise capital losses with particular reference to shares in companies in liquidation are sometimes referred to as 'wash sales' (former Taxation Ruling IT 2643 at paragraph 2).

The term "wash sale" does not have any precise meaning and it is used to describe the sale and purchase of the same, or substantially the same, asset within a short period of time of each other so that the sale and purchase cancel each other out, with the result that there is effectively no change in the economic exposure of the owner to the asset. More generally, the term is used to describe arrangements where a disposition of an asset occurs without an intention of ceasing to hold an economic exposure to the asset.

In the Federal Court case of Cumins v. FCT 2006 ATC 4084; 61 ATR 625 Nicholson J commented at paragraph 38.

It is common ground that a "wash sale" is:

The sale and repurchase of the same security for tax purposes. A wash sale allows an investor to lock-in capital losses for tax purposes even though the fall in share or asset price may be temporary. A wash sale may contravene (CTH) Corporations Act 2001 Pt 7.10 Div 2.

Taxation Ruling TR 2008/1 explains the Commissioner's view on the application of Part IVA of the ITAA 1936 to 'wash sale' arrangements.

A determination under Part IVA of ITAA 1936 may be applied to a transaction if it is determined that there has been:

(c) a tax benefit; and

(d) the sole or dominant purpose of entering into the transaction or scheme was to obtain a tax benefit.

The taxation benefit commonly obtained in connection with a wash sale is a capital loss. For this reason, TR 2008/1 focuses on arrangements which realise a capital loss.

In this case it is planned to sell the BHP Billiton shares in the publicly offered buy-back and the fund will then consider buying a parcel of BHP Billiton ordinary shares within a short period of time. The effect of selling the shares will generate a capital loss in accordance with section 102-10 of the Income Tax Assessment Act 1997 (ITAA 1997).

Your arrangement is not considered to be a wash sale as described in TR 2008/1. This is because it is considered that there are two separate and independent arrangements, firstly, the BHP share buy-back is a publicly available arrangement that is open to all shareholders, and secondly whether or not you purchase shares after the share buy-back is a separate and independent event from the share buy-back that can be undertaken purely at the fund's discretion. Also, the main feature of the buyback is to access franking credits not to derive the tax losses.

Part IVA of the ITAA 1936 is the anti-avoidance provisions and includes all of the sections of 177 of the ITAA 1936.

Part IVA broadly has 2 main components the general anti avoidance provisions and the specific anti-avoidance provisions like the anti-dividend streaming provisions in section 177EA of the ITAA 1936.

For the general anti-avoidance provisions to apply, there must be a 'scheme' (section 177A of the ITAA 1936), a 'tax benefit' (section 177C of the ITAA 1936) and it must be concluded that the scheme was entered into or carried out by a person or persons for the sole or dominant purpose of enabling the relevant taxpayer to obtain the tax benefit (section 177D of the ITAA 1936).

Is there a scheme?

From the details provided of the BHP share buy-back it would come within the meaning of an arrangement and hence come within the meaning of a scheme. It is noted that the Class Ruling CR 2011/43 off market share buy back BHP Billiton Limited treated the buy back as a scheme.

As noted above the proposal to repurchase the shares in BHP is a separate arrangement.

Is there a tax benefit?

The tax benefit is defined in section 177C of the ITAA 1936. The access to the franking credits is not caught within the meaning of "tax benefit" as defined in section 177C of the ITAA 1936. There is no mention of the term tax benefit extending to capture franking credits.

It is noted that the scheme will also result in a capital loss.

So there is a potential tax benefit but only in relation to the capital loss not the substantial franking credits. But the potential tax benefit is not realisable as the Fund is entitled to a tax exemption as a complying superannuation fund in pension mode (under section 295-385 of the ITAA 1997), therefore it is considered there is no tax benefit.

Was the scheme entered into or carried out by a person or persons for the sole or dominant purpose of enabling the relevant taxpayer to obtain the tax benefit?

After weighing up the eight factors in s177 D of the ITAA 1936, it is concluded that you did not enter into the scheme with the sole or dominant purpose of obtaining a tax benefit and therefore s 177D will not apply.

The specific Part IVA anti-avoidance provisions.

Section 177EA of the ITAA 1936 applies where there is a scheme for the disposition of shares or an interest in shares. These arrangements are sometimes known as dividend stripping schemes or dividend streaming schemes.

The Commissioner has considered the off-market share buy-back of BHP Billiton Limited in Class Ruling CR 2011/43. Paragraph 91 to 107 has considered the anti-avoidance provisions. It states at paragraph 102 that the Commissioner has the view that section 177EA of the ITAA 1936 applies to the buy-back. The disposal of the shares is a relevant scheme for the purposes of subsection 177EA(17) of the ITAA 1936.

However the Commissioner has said he will exercise his discretion so that he does not make a determination that the franking credit will be denied under paragraph 177EA(5)(b) of the ITAA 1936 (paragraph 103 of CR 2011/43).

Any other provisions

Section 45B of the ITAA 1936 applies where certain capital payments are paid to shareholders in substitution for dividends (paragraph 94 of CR 2011/43). It applies where:

· a taxpayer is provided with a capital benefit under a scheme

· a taxpayer is provided with a tax benefit under the scheme

· under the circumstances it would be regarded that the person entered the scheme for the purpose of obtaining a tax benefit.

If section 45B applies the Commissioner can make a determination that 45C of the ITAA 1936 applies. The result of this is that the amount of the benefit is taken to be an unfranked dividend (paragraph 91 of CR 2011/43).

It states at paragraph 95 of CR 2011/43 that the requirements of paragraphs 45B(2)(a) and 45B(2)(b) of the ITAA 1936 are met in regards to this Buy-Back. However as the capital component of the buy-back price was determined in accordance with the method preferred in Law Administration Practice Statement PS LA 2007/9, the buy-back is not expected to change the company's distribution history, and due to the buy-back the distribution of share capital will mean a decrease in the participant's ownership interests in the company the Commissioner will not apply section 45C of the ITAA 1936 to this buy-back (paragraph 96 and 97 of CR 2011/43).

Conclusion

In CR 2011/43 the Commissioner has indicated that he will exercise his discretion so that he does not make a determination under paragraph 177EA(5)(b) of the ITAA 1936 to this situation and that section 45C of the ITAA 1936 will not be applied. It is the view of the Commissioner that the sale of the BHP Billiton shares by the superannuation fund to take advantage of the share buy-back is for normal investment purposes. Therefore the dominant purpose to achieve a tax benefit tax is not present for the purposes of Part IVA of the ITAA 1936.

Note we have not answered the question in regard to whether the answer would be different if the fund was in accumulation mode. The fund that the ruling is in regard to is only in pension mode. The Commissioner can only rule in regard to the rulee and their situation.