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).
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.
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. Read a November 2015 report prepared by the KPMG member firm in Australia.
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.
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. Read a November 2015 report prepared by the KPMG member firm in Australia.
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.