Australia: LIFO method guidance for funds | KPMG | GLOBAL

Australia: LIFO method guidance for funds; foreign exchange exposure

Australia: LIFO method guidance for funds

Given 45-day holding period reports are being used to determine the denial of franking credits for a taxpayer, fund managers and superannuation funds need to keep in mind guidance on the application of the last-in-first-out (LIFO) method released late last year by the Australian Taxation Office (ATO).


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For the purposes of calculating how long a taxpayer has held shares under the 45-day holding rule, the ATO’s approach to the LIFO method requires a share parcel sold after an ex-dividend date to be matched against the share parcel(s) purchased before that ex-dividend date—notwithstanding there may be a more recent purchase after the ex-dividend date prior to the sale.

Under a “pure” LIFO method commonly associated with accounting treatment, a share parcel sold after the ex-dividend date is matched against the most recent share parcel purchased, and the share parcel sold may be matched against an ex-dividend share parcel. Unlike the ATO’s approach, the ex-dividend shares (that do not carry entitlements to dividends and franking credits declared for that period) are treated as being sold, and the shares purchased before the ex-dividend date (that carry entitlements to dividends and franking credits) are treated as being still on hand at such sale time. Therefore, the shares purchased before the ex-dividend date would be more likely to satisfy the requisite 45 days under a pure LIFO method compared to the ATO’s approach.

KPMG observation

It is expected that the ATO’s approach would result in a greater denial of franking credits. As such, taxpayers may need to review their current LIFO method approach to determine whether their current approach is consistent with the ATO’s guidelines.

Foreign exchange exposure

One aspect of the decision in the Chevron case concerned the appropriate currency for the borrowing. Differences in interest rates between jurisdictions are to be offset by foreign exchange (FX) rate differences. 

In recent discussions the ATO indicated a focus on certain FX borrowing and hedging activities. In particular, the ATO appears to be concerned that certain low interest rate foreign currency loans are being used as a withholding tax avoidance mechanism when the amount borrowed is then converted into Australian dollar. While withholding tax is applicable to the interest payable on the borrowing, hedging costs associated with the FX exposure are not typically subject to withholding tax.

KPMG observation

It is clear that there is an increased focus on the currency in which borrowings are made, whether or not related international related parties are involved. While the Commissioner’s argument in Chevron was that a lower rate currency was more appropriate, in the withholding tax scenario, the opposite position must be taken. Accordingly, it is necessary to consider both the interest rate on the borrowing and the associated hedging costs when looking at foreign currency borrowings.

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