CFM17105 - Stock loans: anti-avoidance - deemed manufactured payments to lender where there is no provision for borrower to make payments representing dividends or interest income to lender

Anti-avoidance provisions for when the return is paid to the lender in a non-taxable form.

Stock loans enable dividend or interest income to be switched from the lender, who would otherwise receive it, to the borrower. An obvious opportunity for avoidance is to put a security in someone’s hands over a dividend date and to avoid the manufactured payments legislation (CFM17305) by ensuring the return is made to the lender in a different non-taxable form. ICTA88/S736B was enacted to prevent this by deeming a manufactured payment to be made to the lender where none is made in reality. For income tax purposes for 2007-08 and later tax years ICTA/S736B is re-written as ITA07/S596.

It provides that where:

• dividend or interest income is received by someone other than the lender of the security as a consequence of the stock lending arrangement, and
• there is no provision for securing that the lender receives payments representative of the dividend or interest,

then for the purposes of the manufactured payments legislation the borrower is deemed to have paid a manufactured payment to the lender on the date when the real dividend or interest was paid.

The result is that the lender of the securities is still treated as receiving the interest or dividend that it would have received if the stock loan had not taken place. Payments treated as made after 2 October 2000 do not entitle the borrower to any deduction for the deemed manufactured payment in computing its profits or total income.