ATO Interpretative Decision
ATO ID 2010/52 (Withdrawn)
Income Tax
Deductions and expenses: short sale transactions and securities lending arrangementsFOI status: may be released
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This ATO ID is withdrawn because the Reason for Decision requires clarification and may be misleading as there are two separate issues. The relevant ATO IDs relating to this matter are ATO ID 2007/197 and ATO ID 2007/198.This document has changed over time. View its history.
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Can a taxpayer who short sold shares in the course of a business of share trading, and acquired the shares to deliver into that sale under a securities lending arrangement (SLA), deduct from assessable income under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) an amount equivalent to the market value as at 30 June of shares (replacement shares) it was required to acquire in the following income year to close out the SLA?
Decision
No. A taxpayer who short sold shares in the course of a business of share trading, and acquired shares to deliver into that sale, cannot deduct from assessable income under section 8-1 of the ITAA 1997 the market value as at 30 June of replacement shares it was required to acquire in the following income year to close out the SLA.
Facts
The taxpayer carries on business as a share trader. The shares acquired and disposed of by the taxpayer as part of that activity are trading stock as defined in section 70-10 of the ITAA 1997.
In the first income year, the taxpayer agreed to sell shares which it did not presently own (short sale) to another party (the purchaser). The taxpayer subsequently acquired shares (the 'borrowed' shares) from a third party (the 'lender') in that same income year under a SLA and delivered those shares to the purchaser to complete that sale.
Under the terms of the SLA, the taxpayer was also required to buy an equivalent number of identical shares (the replacement shares) to return to the 'lender'. As at the 30 June of the first income year, the taxpayer had not acquired the replacement shares: those shares were to be acquired and delivered to the lender in the following income year (the second income year).
The SLA satisfied the conditions of subsection 26BC(3) of the Income Tax Assessment Act 1936 (ITAA 1936).
In the first income year, the proceeds of the sale of the shares were assessed to the taxpayer as income, and a deduction was allowed against that income for the acquisition of the 'borrowed shares' as trading stock. Pursuant to subsection 26BC(5) of the ITAA 1936, the amount of the deduction for the acquisition of trading stock was the market value of the 'borrowed' shares at the time of their acquisition.
The replacement shares that the taxpayer was to acquire and deliver to the 'lender' under the SLA were not acquired during the first income year. The taxpayer claimed a deduction in that income year equal to the market value of the replacement shares as at 30 June of the first income year.
Reasons for Decision
Section 70-15 of the ITAA 1997 specifies the income year in which a deduction is allowable under section 8-1 of the ITAA 1997 for an outgoing incurred in connection with the acquisition of trading stock. Subsections 70-15(2) and (3) of the ITAA 1997 provide that a deduction is allowable:
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- if an item becomes part of trading stock on hand before or during the income year in which the outgoing is incurred, in that income year;
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- in the first income year in which the item becomes part of trading stock on hand; or
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- in the first income year for which an amount is included in assessable income in connection with the disposal of the item.
The acquisition of the replacement shares and the disposal of those shares to the 'lender' would be the acquisition and disposal of trading stock by the taxpayer.
As at 30 June in the first income year, the taxpayer had not yet acquired the replacement shares. They did not form part of the taxpayer's trading stock on hand in the first income year. Furthermore, no amount had been included in the taxpayer's assessable income in connection with the disposal of the replacement shares in that first income year. Accordingly, no deduction was allowable under section 8-1 of the ITAA 1997 in the first income year in respect of the replacement shares.
The taxpayer would be entitled to a deduction under section 8-1 of the ITAA 1997 for the amount incurred in acquiring the replacement shares in the second income year if they become part of its trading stock on hand in that income year.
Date of decision: 23 February 2010Year of income: Year ended 30 June 2006
Legislative References:
Income Tax Assessment Act 1997
section 8-1
section 70-10
section 70-15
subsection 70-15(2)
subsection 70-15(3)
subsection 26BC(3)
subsection 26BC(5) ATO Interpretative Decisions overturned by this decision
ATO ID 2007/197
ATO ID 2007/198
Keywords
Acquisition of shares
Acquisition of trading stock
Deductions & expenses
Disposal of trading stock
Trading stock
Trading stock on hand
ISSN: 1445 - 2782
| Date: | Version: | |
| 23 February 2010 | Original statement | |
| You are here | 7 November 2014 | Archived |