Edited version of your written advice

Authorisation Number: 1012993032949

Date of advice: 7 April 2016

Ruling

Subject: Imputation system, 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 former 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?

Answer

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 the ASX without an entitlement to receive a dividend (ex-dividend basis), then does it follow that for the purposes of former subsection 160APHE(1) of the ITAA 1936 the share sold became ex-dividend on a date which is before the date of sale?

Answer

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 periods:

Income years ended 30 June 20YY to 30 June 20ZZ

The scheme commenced on:

January 20XX

Relevant facts and circumstances

The taxpayer owns a number of listed and unlisted shares and securities.

The taxpayer receives fully franked dividends in relation to those shares.

The taxpayer also conducts a business of trading in securities, both shares and options over those shares.

Assumption

You have not engaged in a 'dividend washing' arrangement of the type described in Taxation Determination TD 2014/10 and/or to which section 207-157 of the Income Tax Assessment Act 1997 (ITAA 1997) applies.

Relevant legislative provisions

Income Tax Assessment Act 1936 former Division 1A, Part IIIAA

Income Tax Assessment Act 1936 former section 160APHD

Income Tax Assessment Act 1936 former subsection 160APHE(1)

Income Tax Assessment Act 1936 former section 160APHO

Income Tax Assessment Act 1936 section 177EA

Income Tax Assessment Act 1997 Subdivision 207-F

Income Tax Assessment Act 1997 paragraph 207-145(1)(a)

Income Tax Assessment Act 1997 section 207-157

Further issues for you to consider

Dividend washing

The government has enacted a specific integrity rule (section 207-157 of the Income Tax Assessment Act 1997) that prevents taxpayers from obtaining a tax benefit from additional franking credits where dividends are received as a result of dividend washing.

Dividend washing occurs when shareholders seek to claim two sets of franking credits on what is effectively the same parcel of shares.

The new integrity rule:

• applies from 1 July 2013

• is activated to the extent that an entity, or an associate of an entity, disposes of the membership interest without the right to the dividend (ex-dividend) and then acquires a substantially identical membership interest with the right to the dividend (cum-dividend)

• ensures that the entity would not be entitled to the additional franking credit tax offset on the distribution on the membership interest acquired, and that the amount of the franking credit on that distribution will not be included in the assessable income of the entity

• will generally not affect individual shareholders who have franking credit tax offset entitlements of $5,000 or under (the small shareholder exemption from the holding period rules)

The measure received royal assent on 30 June 2014.

Where distributions have been received prior to 1 July 2013, the Commissioner of Taxation may apply section 177EA of the ITAA 1936 to deny franking credit benefits received through dividend washing arrangements. The ATO's view on the application of this general anti-avoidance rule to dividend washing arrangements is explained in Taxation Determination TD 2014/10.

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 you and you are not a qualified person the franking credit attached to the distribution could not be included in your assessable income and you 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

Former section 160APHO of the ITAA 1936 generally states that you would be a qualified person if, among other things, you held the shares on which a dividend has been paid for a continuous period of at least 45 days during the primary qualification period (or 90 days if the shares are preference shares), excluding the date of acquisition and disposal.

The primary qualification period is defined under former section 160APHD of the ITAA 1936 as the period beginning on the day after the day on which the shares were acquired and ending on the 45^th 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 former subsection 160APHE(1) 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 a 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 you have purchased with an entitlement to a dividend will have occurred before the relevant ex-dividend date for the purposes of determining your 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 shares are 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 you have purchased on an ex-dividend basis will have occurred on or after the ex-dividend date for the purposes of determining your primary qualification period in relation to the holding period.