Franking credits 45 day rule question

[Sharkman]

the ATO gives this example:

Example 7: Substantially identical shares
Jessica has held 10,000 shares in Mimosa Pty Ltd for 12 months. She purchased an additional 4,000 shares in Mimosa Pty Ltd 10 days before they became ex-dividend (the day after the last day on which acquisition of the shares will entitle you to receive a dividend) and then sold 4,000 shares 20 days after Mimosa Pty Ltd shares became ex-dividend. Her total franking credit entitlement for the income year was more than $5,000. The shares she sold are deemed to have been held for less than 45 days, based on the last in first out method. Jessica would not be entitled to the franking credits on the 4,000 shares sold.

what i'm unclear on is if i did something slightly different to the above:

day 1: buy 1000 ANZ
day 20: ANZ goes ex-div
day 30: buy 1000 ANZ and sell 1000 ANZ (vertical option spread where both legs have expired ITM)
day 50: sell 1000 ANZ

i will have more than $5,000 in franking credits for the year. can i still claim the franking credits on the first lot of 1000 bought on day 1 by declaring that the units sold on day 30 all come from the lot that was bought on day 30?

ATO won't give an answer over the phone. they also don't take email queries anymore, have to send a letter by snail mail (what is this, are we still living in the 20th century?) which is a bit of a hassle, and who knows whether they'll even respond. so i was hoping if someone might know for sure what the ruling is in this sort of situation?

 

[rnr]

What are you trying to achieve by the Vertical Option Spread (VOS)?

Will the VOS diminish your risk associated with holding your original shares for an additional 20 days?

 

[Sharkman]

What are you trying to achieve by the Vertical Option Spread (VOS)?

Will the VOS diminish your risk associated with holding your original shares for an additional 20 days?

yes it is partially hedging delta. i am actually only long stock + long puts at the moment, and the overall delta was definitely above 0.3 at the time of opening the position, but with the stock dropping sharply and the position being +gamma, the delta has likely dropped below 0.3 by now (that's yet another thing that's not clear - how is risk mitigation measured? is it the delta at the time of the trade? or something ridiculous like the average daily delta across the duration of the position? i have no idea).

assuming the delta isn't an issue for now (i have claimed franking credits in past years in similar situations ie. delta > 0.3 at time of trade, delta fell below 0.3 during the trade due to being +gamma, and nothing came of it), my conundrum is this:

- if i let the puts expire ITM, i definitely lose the franking credits as exercising the puts will result in the stock being sold off before 45 days have passed
- if i go on the options market and sell to close what are now deep ITM puts to protect the franking credits by preserving the stock position, that will realise a substantial profit (which gets booked to normal income, not capital gains, as the source is an options trade) and i don't want to book more profit this year for tax reasons

but i like the idea of spreading off the puts by selling ATM puts. i'm selling into what is now high IV, just over 2 weeks to expiry giving great theta, the market is now at the sort of level where i actually wouldn't mind getting long the stock, and selling puts gives +delta which will help in case there's any issues with the > 0.3 delta rule. if both legs expire ITM it solves my tax problem, as that will result in having stock put to me at the low strike and immediately being sold at the high strike, booking the profit as undiscounted capital gains instead of normal income, which is fine as i have the capital losses to negate it.

however, whether it preserves the franking credits or not (should both legs expire ITM) depends on whether i'm allowed to nominate the units sold on expiry day as being the units that were bought on the same day, thus leaving the original parcel being held for 47+ days and therefore qualifying for the franking credits. i don't think there's anything in there that says i'm forced to use FIFO, but like many areas of tax, it's not entirely clear.

 

[sydbod]

I think the "based on the last in first out method" used by the Tax Department will give you the answer you desire.
So long as you "buy 1000 ANZ" and then "sell 1000 ANZ (vertical option spread where both legs have expired ITM)" in that time order on day 30, I believe you should be OK.

Example 7: Substantially identical shares

Jessica has held 10,000 shares in Mimosa Pty Ltd for 12 months. She purchased an additional 4,000 shares in Mimosa Pty Ltd 10 days before they became ex-dividend (the day after the last day on which acquisition of the shares will entitle you to receive a dividend) and then sold 4,000 shares 20 days after Mimosa Pty Ltd shares became ex-dividend. Her total franking credit entitlement for the income year was more than $5,000. The shares she sold are deemed to have been held for less than 45 days, based on the last in first out method. Jessica would not be entitled to the franking credits on the 4,000 shares sold.

 

[rnr]

Hi Sharkman

For your info I am neither a tax lawyer, tax accountant or ATO employee.

yes it is partially hedging delta. i am actually only long stock + long puts at the moment, and the overall delta was definitely above 0.3 at the time of opening the position, but with the stock dropping sharply and the position being +gamma, the delta has likely dropped below 0.3 by now (that's yet another thing that's not clear - how is risk mitigation measured? is it the delta at the time of the trade? or something ridiculous like the average daily delta across the duration of the position? i have no idea).

ATO info (QC 39802)

“If you acquire shares or an interest in shares and you have not already satisfied the holding period rule before the day on which the shares become ex-dividend* (the day after the last day on which acquisition of the shares will entitle you to receive the dividend), the holding period rule commences on the day after the day on which you acquired the shares or interest. You must hold the shares or interest for 45 days (90 days for certain preference shares) excluding the day of disposal. For each of these days you must have 30% or more of the ordinary financial risks of loss and opportunities for gain from owning the shares or interest.”

I believe the ATO info is quite clear in that any day in which delta falls below +0.3 should be excluded and therefore reduce the holding period.

assuming the delta isn't an issue for now (i have claimed franking credits in past years in similar situations ie. delta > 0.3 at time of trade, delta fell below 0.3 during the trade due to being +gamma, and nothing came of it)

It would seem that you have claimed franking credits to which you were not entitled.
How would the ATO know all these details unless you have requested a Private Ruling in which all the information relating to these transactions have been disclosed.

 

[PinkGirl]

the ATO gives this example:

Example 7: Substantially identical shares
Jessica has held 10,000 shares in Mimosa Pty Ltd for 12 months. She purchased an additional 4,000 shares in Mimosa Pty Ltd 10 days before they became ex-dividend (the day after the last day on which acquisition of the shares will entitle you to receive a dividend) and then sold 4,000 shares 20 days after Mimosa Pty Ltd shares became ex-dividend. Her total franking credit entitlement for the income year was more than $5,000. The shares she sold are deemed to have been held for less than 45 days, based on the last in first out method. Jessica would not be entitled to the franking credits on the 4,000 shares sold.

what i'm unclear on is if i did something slightly different to the above:

day 1: buy 1000 ANZ
day 20: ANZ goes ex-div
day 30: buy 1000 ANZ and sell 1000 ANZ (vertical option spread where both legs have expired ITM)
day 50: sell 1000 ANZ

i will have more than $5,000 in franking credits for the year. can i still claim the franking credits on the first lot of 1000 bought on day 1 by declaring that the units sold on day 30 all come from the lot that was bought on day 30?

ATO won't give an answer over the phone. they also don't take email queries anymore, have to send a letter by snail mail (what is this, are we still living in the 20th century?) which is a bit of a hassle, and who knows whether they'll even respond. so i was hoping if someone might know for sure what the ruling is in this sort of situation?

In the hypothecial example the delta is calculated at the time of entering into the trade and continues until you touch the position, ie day 30 the delta would be recalculated here

However, based on the LIFO rule the 1,000 ANZ shares entitled to dividend have only been held at risk for 28 days so based on the hypothecial example franking credits on the dividend are lost.

Note - nothing in this post should be taken to be professional tax advice, you should obtain professional tax advice or seek a private ruling from the Australian Taxation Office specific to your individual circumstances.