Edited version of your written advice

Authorisation Number: 1051201704217

Date of advice: 13 March 2017

Ruling

Subject: Securities lending agreements

Question 1

Would the automatic rollover relief available to taxpayers engaging in eligible securities lending arrangements in section 26BC of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the transfer of shares from Taxpayers A and B to the Trust under the respective securities lending arrangements?

Answer

Yes

Question 2

Would the trustee of the Trust be able to claim a deduction for the 'attributable part' of the dividend paid by the ASX listed company and received by the trust as per section 115-280 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following periods:

2016-17 income year

The scheme commences on:

The scheme has yet to commence

Relevant facts and circumstances

Taxpayers A and B are Australian resident private companies that hold shares in a public company listed on the Australian Stock Exchange (ASX).

The ASX listed company is a listed investment company for tax purposes.

The ASX listed company has LIC capital gains for tax purposes.

Some of the shares held by Taxpayers A and B in the ASX listed company are pre-CGT shares.

A scheme is proposed whereby Taxpayers A and B each enter into separate written Securities Lending Agreements (SLAs) with the trustee of the Trust.

Under the proposed SLAs:

● Taxpayers A and B will agree to lend the ASX listed company shares to the trustee of the Trust and the trustee of the Trust agrees to borrow the securities from Taxpayers A and B in accordance with the terms set out in the SLAs

● Taxpayers A and B will procure the delivery of the ASX listed company shares to the trustee of the Trust and will provide the appropriate instruments required to vest title in those share to the trustee of the Trust

● the shares will be transferred using a Standard Transfer Form which records details such as the issuer of the security, the description and quantity of the securities, the consideration/value of the transfer as well as full transferor and transferee details

● the trustee of the Trust will become the registered security holder of the ASX listed company shares subject to the SLAs

● where a dividend is paid by the ASX listed company on shares which, on a payment date, are still borrowed, the trustee of the Trust will receive payment of the dividend

● the trustee of the Trust will pay to Taxpayers A and B a sum of money equivalent to the amount that Taxpayers A and B would have been entitled to receive (after taking into account any deduction, withholding or payment for or on account of any tax made by the relevant issuer) had the ASX listed company shares not been loaned and been held by Taxpayers A and B on the payment date

● the trustee of the Trust is required to give to Taxpayers A and B a “Transfer of Distribution Statement” in a form which is acceptable for the purposes of section 216-30 of the ITAA 1997 in respect of the dividend received on the borrowed ASX listed company

● in consideration for Taxpayers A and B entering into the proposed SLA, the trustee of the Trust will pay interest to both Taxpayers A and B in respect of each loan of ASX listed company shares made under the proposed SLA equivalent to that payable by arm's length parties

● the interest will accrue daily, be calculated on the basis of a 365 day year and all accrued but unpaid interest will be capitalised on the last business day of each month

● the trustee of the Trust will pay interest to Taxpayers A and B quarterly in arrears; and

● in respect of each loan of ASX listed company shares, the trustee of the Trust must redeliver equivalent securities to Taxpayers A and B within 12 months or five (5) business days after the date of a default notice.

The terms of the SLAs to be entered into between Taxpayer A and the ASX listed company and Taxpayer B and the ASX listed company will be will be drafted in a manner consistent with those terms listed above.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 26BC.

Income Tax Assessment Act 1936 subsection 26BC(1).

Income Tax Assessment Act 1936 subsection 26BC(3).

Income Tax Assessment Act 1936 paragraph 26BC(3)(a).

Income Tax Assessment Act 1936 paragraph 26BC(3)(b).

Income Tax Assessment Act 1936 subparagraph 26BC(3)(c)(i).

Income Tax Assessment Act 1936 subparagraph 26BC(3)(c)(iv).

Income Tax Assessment Act 1936 paragraph 26BC(3)(d).

Income Tax Assessment Act 1936 paragraph 26BC(3)(e).

Income Tax Assessment Act 1936 subsection 26BC(5).

Income Tax Assessment Act 1936 paragraph 26BC(9)(b).

Income Tax Assessment Act 1997 Subdivision 115-D.

Income Tax Assessment Act 1997 subsection 115-280(1).

Income Tax Assessment Act 1997 subparagraph 115-280(1)(a)(i).

Income Tax Assessment Act 1997 paragraph 115-280(1)(b).

Income Tax Assessment Act 1997 paragraph 115-280(1)(c).

Income Tax Assessment Act 1997 subsection 115-280(2).

Income Tax Assessment Act 1997 subsection 115-280(3).

Reasons for decision

Question 1

Section 26BC of the ITAA 1936 provides automatic rollover relief to taxpayers who engage in eligible securities lending arrangements.

Relevantly, section 26BC of the ITAA 1936 will apply if the following conditions are satisfied:

● there is a written agreement of the kind known as a securities lending arrangement entered into after 9 May 1990 under which a taxpayer (referred to as 'the lender') disposes of an eligible security (referred to as 'the borrowed security') to another taxpayer (referred to as 'the borrower') and the lender acquires an identical security (referred to as a 'replacement security') within a period not exceeding 12 months of the time of disposal of the original security (paragraph 26BC(3)(a) of the ITAA 1936);

● both the borrower and lender were dealing with each other at arm's length in respect of the securities lending arrangement (paragraph 26BC(3)(b) of the ITAA 1936)

● if there is a making or a payment of a distribution in respect of the borrowed security during the borrowing period, then under the agreement the lender receives from the borrower a distribution (including a distribution in property) or a payment equal to the value of the distribution (referred to as a 'compensatory payment' (subparagraphs 26BC(3)(c)(i) and 26BC(3)(c)(iv) of the ITAA 1936)

● any consideration received by the lender from the borrower other than the replacement security, such as a fee, market value adjustments of the eligible securities or other consideration must be identified in the written agreement (paragraph 26BC(3)(d) of the ITAA 1936); and

● the lender does not dispose of the right to receive any part of the total consideration payable or to be given by the borrower under the securities lending arrangement (paragraph 26BC(3)(e) of the ITAA 1936).

The terms 'eligible security' and 'distribution' are defined in subsection 26BC(1) of the ITAA 1936. Relevantly, an eligible security means a share issued in a public company and a distribution includes interest or a dividend.

Where the above criteria are satisfied, the relevant following relief is available to the lenders in a securities lending agreement:

● the borrower is treated as if the transaction never occurred for the purposes of determining the lender's assessable income (excluding CGT) or deductibility of an amount (subsection 26BC(5) of the ITAA 1936); and

● where the borrower does not dispose of the borrowed security to a third party, the transaction is ignored in determining CGT implications (paragraph 26BC(9)(b) of the ITAA 1936).

Application

Under the proposed scheme:

● the SLAs will be in writing and entered into after 9 May 1990

● Taxpayers A and B will dispose of shares held in an ASX listed company to the trustee of the Trust

● within 12 months of the above disposal Taxpayers A and B will receive replacement securities from the trustee of the Trust

● Taxpayers A and B will be dealing with the trustee of the Trust at arm's length in respect of the securities lending agreement

● Taxpayers A and B will receive a compensatory payment equal to the value of any such amount received by the trustee of the Trust in respect of the ASX listed company shares

● consideration other than the replacement security is provided for in the written agreement, specifically interest payable and the compensatory payment; and

● neither Taxpayer A nor B will dispose of the right to receive any part of the total consideration payable or to be given by the trustee of the Trust under the respective SLAs.

As the requirements of subsection 26BC(3) of the ITAA 1936 are met, the following relief is available to the Trust in its capacity as borrower under the proposed SLAs:

● the transaction will be ignored for general income tax purposes (excluding CGT); and

● the transaction will be ignored for CGT purposes where the borrowed security is not sold to a third party.

Question 2

Subdivision 115-D of the ITAA 1997 provides tax relief for shareholders in listed investment companies.

On the basis of the facts of the proposed scheme, if the following conditions listed in subsection 115-280(1) of the ITAA 1997 are satisfied, a taxpayer can deduct an amount for a dividend paid to them by a company:

● the taxpayer is a trust (subparagraph 115-280(1)(a)(i) of the ITAA 1997)

● the dividend is paid when the taxpayer is an Australian resident for tax purposes (paragraph 115-280(1)(b) of the ITAA 1997); and

● all or some part of the dividend is reasonably attributable to a LIC capital gain made by a listed investment company (LIC) (paragraph 115-280(1)(c) of the ITAA 1997.

Where the above conditions are satisfied, the amount of the deduction is 50% of the taxpayer's share of the amount (referred to as 'the attributable part') worked out in accordance with the formula provided in subsection 115-280(3) of the ITAA 1997.

The Trust is trust and will be a resident trust at the time any dividends will be paid. Those dividends will be sourced from LIC capital gains made by the ASX listed company, a LIC for tax purposes.

The Trust will therefore be entitled to deduct 50% of its share of the attributable part, calculated in accordance with subsection 115-280(3) of the ITAA 1997.