Specific tax rule to prevent dividend washing

On 28 June 2013, the Assistant Treasurer announced that the Government will prevent "dividend washing" by introducing a specific integrity rule into the tax law. This follows the Government’s 2013–2014 Federal Budget announcement that it will implement reforms to close, with effect from 1 July 2013, a loophole it says currently enables sophisticated investors to engage in "dividend washing".

"Our approach will ensure that sophisticated investors are no longer able to receive two sets of franking credits on what is essentially the same parcel of shares," said Mr Bradbury. He added that the measure "will not have an impact on typical 'mum and dad' investors, as it will only apply to investors that have franking credit tax offset entitlements in excess of $5,000". Further, he said the "measure has been targeted to ensure that it will not impact on ordinary trades undertaken on share markets". According to this latest announcement, the measure is still proposed to commence from 1 July 2013.

Key features of the proposed specific integrity rule include the following:

• The integrity rule will be inserted into the Income Tax Assessment Act 1997 (ITAA 1997).

• It will be targeted to the period between the ex-dividend date and the record date of a membership interest. The record date is the day on which a company closes its share register to determine which shareholders are entitled to a dividend. Under Australian Securities Exchange procedures, the ex-dividend date comes four business days before the record date.

• During this period, the rule will be activated to the extent that an entity, or an associate of an entity, disposes of the relevant membership interest without the right to the dividend (that is, on an ex-dividend basis), and then acquires a substantially identical membership interest with the right to the dividend (that is, on a cum-dividend basis).

• When the rule is activated, the entity will not be entitled to a franking credit tax offset on the distribution on the membership interest acquired with the right to the dividend, and the amount of the franking credit on the distribution on the acquired membership interest will not be included in the assessable income of the entity.

On 3 June 2013, the Government issued a discussion paper that canvassed potential approaches to preventing dividend washing. Treasury received 10 submissions in response to the Government's discussion paper. A summary of the submissions and Treasury's responses are available on the Treasury website at: www.treasury.gov.au/ConsultationsandReviews/Submissions/2013/Dividend-Washing.

The Assistant Treasurer said "further consultation will occur on exposure draft legislation in due course".

Source: Assistant Treasurer's media release, 28 June 2013, www.treasurer.gov.au/DisplayDocs.aspx?doc=pressreleases/2013/127.htm&pageID=003&min=djba&Year=&DocType=.