ATO Interpretative Decision
ATO ID 2002/604
Income Tax
45-day holding period rule - 'materially diminished' risksFOI status: may be released
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
For the purposes of subsection 160APHM(2) of the Income Tax Assessment Act 1936 (ITAA 1936), do the beneficiaries of a discretionary trust have 'materially diminished' risks in respect of their interests in the shares held by the trust?
Decision
Yes, for the purposes of subsection 160APHM(2) of the ITAA 1936 the beneficiaries of a discretionary trust do have "materially diminished" risks in respect of their interests in the shares held by the trust.
Facts
The trust is a discretionary trust. The beneficiaries do not have vested and indefeasible interests. The trustee purchased shares in the year 2000. The trustee has not entered into an option or any other derivative in relation to these shares. Franked dividends were paid on these shares.
Reasons for decision
To qualify for franking benefits a taxpayer must be a 'qualified person': as per section 160 APHO of Division 1A of Part IIIAA of the ITAA 1936 and hold the shares or interest in shares at risk for the minimum 'qualifying period'.
Section 160APHO requires shares or interests in shares to be held at risk for 45 days (90 days for preference shares). However, days where the taxpayer has materially diminished risks of loss or opportunities for gain in respect of shares or interests in shares are not taken into account (subsection 160APHO(3)). There is a material diminution of risk if the taxpayer's net position is less than 30% (subsection 160APHM(2)). The net position is calculated by adding the sum of the taxpayer's long positions (+deltas) and the sum of the taxpayer's short positions (-deltas) (subsection 160APHJ(5)).
In calculating a discretionary beneficiary's net position in the interest in the shares held by the trust, long and short positions are determined by an actual financial calculation or a deeming provision (subsection 160APHG(3) and subsections 160APHL(5)(8)(9)(10) and (11)). Subsection 160APHL(7) would deem the beneficiary's long position with a delta of +1. However, subsection 160APHL(10) would deem a short position with a delta of -1. The net position would be zero. Zero is less than 30% and so there is a material diminution of risk within subsection 160APHM(2).
Date of decision: 14 December 2001
Legislative References:
Income Tax Assessment Act 1936
section 160APHO
subsection 160APHG(3)
subsection 160APHJ(5)
subsection 160APHL(5)
subsection 160APHL(7)
subsection 160APHL(8)
subsection 160APHL(9)
subsection 160APHL(10)
subsection 160APHL(11)
subsection 160APHM(2)
subsection 160APHO(3)
Keywords
Imputation system
Discretionary trusts
Trusts
Shares
Family trust election
Imputation credits
Siebel/TDMS Reference Number: DW241404; 1-AANODT9
Business Line: Private Groups and High Wealth Individuals
Date of publication:
31 May 2002
Date reviewed:
19 December 2016
ISSN: 1445-2782