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ATO warns of schemes to access additional franking credits

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The ATO has cautioned taxpayers against trading shares on a special market operated by the Australian Securities Exchange (ASX) with the sole purpose of obtaining additional franking credits. The ATO says the transactions could constitute dividend washing, which the ATO says is not allowable under tax law. It says the special market operated by the ASX was established to facilitate options trading and that dividend washing trading strategies attempt to take advantage of a company's shares being traded on this special market in order to generate an unintended outcome.

According to the ATO, the arrangements of concern occur where a taxpayer sells shares in a company on the ordinary market after a franked dividend has been announced, and so retains the franked dividend. Then, within days the taxpayer buys back a similar parcel of shares in the same company on the special market, which also entitles them to the franked dividend on those shares.

The ATO says it intends to issue a public ruling on the issue, and taxpayers who enter into such trades may face penalties under anti-avoidance provisions in Pt IVA. In addition, the ATO considers that taxpayers who participate in such arrangements may not be qualified persons for the purposes of the franking credit rules and hence franking credits may not be available.

More specifically, the ATO says the arrangements of concern have some or all of the following features:

  • the taxpayer owns a parcel of ordinary shares in an Australian listed company for at least 45 days (Parcel A) and the company announces a franked dividend;

  • the taxpayer sells Parcel A on the ordinary share market but retains the right to the franked dividend;

  • shortly afterwards, the taxpayer repurchases a further parcel of ordinary shares of the same or similar value in the company (Parcel B) on a special market operated by the ASX, which also includes a right to receive the franked dividend;

  • Parcel B shares may also trade at a premium that reflects the value to investors of the dividends and franking credits. The seller of parcel B shares forgoes the franking credit that they may be unable to use;

  • the taxpayer may make a loss when they sell Parcel A and subsequently purchase Parcel B;

  • the only reason for the sale of Parcel A and the subsequent purchase of Parcel B is to access the franking credits attached to the dividend declared on the Parcel B shares; and

  • the taxpayer then holds Parcel B for at least 45 days and receives the dividends and franking credits on both Parcel A and Parcel B, and the taxpayer is also able to make full use of the franking credits.

The ATO notes that such arrangements may appear particularly beneficial where the tax payable on the two sets of dividends is less than the combined franking credits.

Source: ATO media release, 3 October 2013, www.ato.gov.au/Media-centre/Media-releases/ATO-warns-on-trading-shares-on-the-special-market-to-obtain-additional-franking-credits/.

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