Is Ms Soubra a ‘qualified person’?
Section 207-45 of the ITAA 1997 states that an entity to which a franked distribution flows indirectly is entitled to a tax offset which is equal to its share of the franking credit on the distribution, if it is an individual. Under this section of the ITAA 1997, it appears that Ms Soubra would be entitled to a tax offset in respect of a franked dividend distribution.
However, Subdivision 207-F states that a tax offset is not available where the imputation system has been manipulated. One example of such a situation is where the entity is not a qualified person.
As previously mentioned, being a qualified person is based on the time the shares were held at risk (that is, the 45 day rule) and the degree of risk incurred by the holder of the shares (that is, net delta position).
Under Section 160APHL (7) and (10), Ms Soubra has:
• a long position of +1 in relation to the share holding; and
• a short position equal to her long position.
Ms Soubra has a net delta position equal to zero (long position of +1 and short position of -1). As this is below +0.3, Ms Soubra is taken to have diminished the risks and opportunities for gain for the entire period of her holding. As a result, she would not be a qualified person for the purposes of s 160APHP.
A vested and indefeasible interest?
Section 160APHL(11) states that for the purposes of subsection (10), a taxpayer’s interest in the trust holding is a fixed interest to the extent that the interest is constituted by a vested and indefeasible interest.
As the allocation of units in the trust was subject to a three-year vesting condition, Ms Soubra’s interest is rendered defeasible. This alone was sufficient to conclude that Ms Soubra’s interest was not fixed; however, there were further indicators such as the trustee’s absolute discretion in relation to investments, the cancellation of entitlements of unitholders under the trust deed, and the reduction of the value of the interest, which could occur on redemption.
Decision and its ramifications
The AATA concluded that Ms Soubra was not a qualified person; nor was her interest in the trust considered a fixed interest.
It is unlikely that the trust deed in question is unique in each of the areas highlighted, and the decision upheld by the AATA could have ramifications for employees of other employee share plans. Advisers would do well to take note and review any clients who may be in a similar situation.
NOTES:
1. Section 160APHO Income Tax Assessment Act 1936.
2. Section 160APHP Income Tax Assessment Act 1936.
3. Section 160APHM Income Tax Assessment Act 1936.
4. Section 160APHO Income Tax Assessment Act 1936.
5. Section 160APHN Income Tax Assessment Act 1936.
6. Section 160APHM Income Tax Assessment Act 1936.
7. Harmer v FCT [1991] HCA 51.
8. Section 160APHL(7) Income Tax Assessment Act 1936.
9. Section 160AHPL(10) Income Tax Assessment Act 1936.
Adrian Hanrahan is a technical analyst for Plan B Wealth Management.
