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Edited version of private advice
Authorisation Number: 1012650732742
Ruling
Subject: Collar Strategy
Question 1
Does a net position in relation to shares, or an interest in shares, for the purposes of former section 160APHJ of the Income Tax Assessment Act 1936 (ITAA 1936) include all positions held by the Fund in respect of those shares?
Answer
Yes.
Question 2
Will the put and call options held by the Fund over shares under the Collar Strategy be related payments for the purposes of former section 160APHN ITAA 1936?
Answer
No
Question 3
Will the Fund satisfy the definition of a qualified person as defined in former section 160APHD ITAA 1936 in relation to the dividends paid on shares which are acquired by the Fund under the Collar Strategy?
Answer
Yes
Question 4
Will the Commissioner make a determination pursuant to subsection 177EA(5)(b) ITAA 1936 to deny franking credits attached to dividends received by the Fund on shares acquired under the Collar Strategy to the extent that no dividend collar is entered into?
Answer
No
This ruling applies for the following period:
Year ending 30 June 2014 and future year
The scheme commences on:
The scheme is yet to commence.
Relevant facts and circumstances
The Fund is an unregistered managed investment scheme. The Trustee of the Fund an Australian resident company for income tax purposes.
Of the direct and indirect investments entered into by the Fund, a significant asset sector is the Australian Equities Sector. The Investment Manager has been engaged by the Fund to develop a strategy to improve the excess return generated by the Australian equity portfolio compared to the market benchmark (the excess is also known as "alpha").
Proposed Collar Strategy
The Investment Manager has proposed a Collar Strategy to generate additional "alpha" for the Fund.
Assumptions
For the purposes of this ruling it is assumed that:
a. the Fund is an unregistered managed investment scheme under section 9 of the Corporations Act 2001;
b. the Fund has made the MIT capital election under section 275-115 of the Income Tax Assessment Act 1997;
c. all transactions entered into will be on arm's length terms.
Relevant legislative provisions
section 177D of the Income Tax Assessment Act 1936
section 177EA of the Income Tax Assessment Act 1936
former section 160APHJ of the Income Tax Assessment Act 1936
former section 160APHN of the Income Tax Assessment Act 1936
former section 160APHD of the Income Tax Assessment Act 1936
former section 160APHO of the Income Tax Assessment Act 1936
former section 160APHE of the Income Tax Assessment Act 1936
former section 160APHM of the Income Tax Assessment Act 1936
former section 160APHH of the Income Tax Assessment Act 1936
section 9 of the Corporations Act 2001
Reasons for decision
Question 1
Does a net position in relation to shares, or an interest in shares, for the purposes of former section 160APHJ ITAA 1936 include all positions held by the Fund in respect of those shares?
Answer
Yes. A net position in relation to shares, or an interest in shares, should include all positions held by the Fund in respect of those shares.
Question 2
Will the put and call options held by the Fund over shares under the Collar Strategy be related payments for the purposes of former section 160APHN ITAA 1936?
Answer
No.
Question 3
Will the Fund satisfy the definition of a qualified person as defined in former section 160APHD ITAA 1936 in relation to the dividends paid on shares which are acquired by the Fund under the Collar Strategy?
Answer
Yes.
The Fund will meet the 'qualified person' test on the basis of the features set out in the relevant facts and circumstances, including the assumptions, of this Ruling:
a. The put and call options entered into by the Fund in relation to the shares held by the Fund will have a negative delta that will never be less than -0.7.
b. The put and call options entered into by the Fund in relation to the shares held by the Fund will not result in a related payment that would impact the 'qualified person' test (paragraph 160APHJ(10)(c)) (see question 2 above).
c. The shares, which are not preference shares, will be held for a minimum of 45 days (subsection 160APHO(2)) over which the Fund would not be considered to have 'materially diminished risks of loss or opportunities for gain in respect of the shares' (subsection 160APHO(3)).
Question 4
Will the Commissioner make a determination pursuant to subsection 177EA(5)(b) ITAA 1936 to deny franking credits attached to dividends received by the Fund on shares acquired under the Collar Strategy to the extent that no dividend collar has been entered into?
Answer
No.