Taxation Determination TD 2014/10 deals with what is known as ‘dividend washing. ln the ATO’s view, dividend washing occurs when shareholders seek to claim two sets of franking credits for what is effectively the same economic parcel of shares.
In the 2013 Federal Budget, the then government announced it would legislate against the practice. It is understood that legislation is now proposed that will introduce an integrity rule to limit the gross-up and tax offset rules within the dividend imputation system applying in cases where taxpayers have engaged in dividend washing.
That proposed legislation follows draft legislation released earlier in 2014 that would apply from 1 July 2013 and would introduce an integrity rule. The rule would be activated to the extent that an entity, or an associate of an entity, disposes of the membership interest without the right to the dividend (ex-dividend) and then acquires a substantially identical membership interest with the right to the dividend (cum-dividend). The new rule is only proposed to apply to investors who have franking credit tax offset entitlements in excess of $5,000.
In the meantime, Taxation Determination TD 2014/10 states the Commissioner’s view that s177EA (one of the Part IVA anti-avoidance measures) will generally apply to a ‘dividend washing’ scheme as described in the following example.
Example
The trustee for the Payton self managed superannuation fund (Payton) holds an interest, being a parcel of 10,000 shares (Parcel A), in ZCF Limited (ZCF) that is listed on the Australian Securities Exchange (ASX). Payton has held Parcel A for at least 45 days.
On 27 August 2013 (the ex-dividend date), Payton sells Parcel A for $5 each share on an ex-dividend basis on the normal ASX market. Its proceeds from the sale are $50,000. Payton then uses the proceeds to purchase a further 10,000 ZCF shares (Parcel B) on a Special Market operated by the ASX for $5.16 per share (total cost of this transaction is $51,600). Parcel B shares include the rights to receive the franked dividends. This is known as shares trading on a ‘cum-dividend’ basis.
On 14 October 2013, Payton receives franked dividends of $1,400 with franking credits of $600 in respect to both Parcel A and Parcel B. As such, Payton receives dividends totalling $2,800 (the August and October dividends, being $1,400 x 2) plus franking credits of $1,200 ($600 x 2). The total result of the transactions by Payton is a cost of $1,600 (difference between the proceeds from the sale of Parcel A and the purchase of Parcel B) and additional dividends of $1,400 from Parcel B.
Without the additional franking credits of $600 attached to Parcel B, the trades would result in a loss of $200. With the additional credits, the trades are profitable. At the end of the transactions, Payton still holds the same number of shares in ZCF and Parcel B will be held for at least 45 days after the date of purchase. The ATO considers that the key elements, as described in the example, “would likely be a scheme entered into for a more than incidental purpose of enabling a participant to obtain an imputation benefit for the purposes of para 177EA(3)(e) in respect of the acquisition of the same, or substantially similar, quantity of Parcel B shares”.
