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Dividend washing hung out to dry

Aaron Dunn  |  21 Jan 2014Text size  Decrease  Increase  |  

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Aaron Dunn is the managing director of the SMSF Academy.


Double franking credits from dividends in listed Australian companies sound to go to be true? Well, that's certainly what the Australian Taxation Office (ATO) now thinks, having issued draft tax determination, TD 2014/D1, which considers the application of Part IVA to such dividend-washing schemes.

In formulating the draft determination, the commissioner has indicated by way of the following example how section 177EA of the Income Tax Assessment Act (ITAA) 1936 would apply to such arrangements.


Dividend-washing example

The Smith Super Fund (fund) holds 10,000 shares in ZCF Limited (ZCF), a listed company on the Australian Securities Exchange (ASX) (parcel A). The fund has held parcel A for at least 45 days.

On 12 August 2013, ZCF announces a fully franked dividend of 14 cents per share with a franking credit of 6 cents per share. Shares in ZCF will go ex-dividend (in that they will trade without an entitlement to receive this dividend) on 27 August 2013.

On 27 August 2013, the fund trustee sells parcel A (10,000 shares) for $5.00 each on an ex-dividend basis on the normal ASX market, receiving $50,000 proceeds from the sale. The proceeds received from the sale of parcel A are used to purchase a further 10,000 ZCF shares (parcel B) on a "special market" operated by the ASX for $5.16 per share; (total $51,600).

The parcel B shares purchased on the special market include the rights to receive the franked dividends announced by ZCF on 12 August 2013. This is known as shares trading on a "cum-dividend" basis.

The special market is open for trading from 27 August 2013 to 28 August 2013. ZCF shares purchased on the special market can trade at a premium because shares purchased on this market include the rights to receive the franked dividends announced by ZCF on 12 August 2013.

On 14 October 2013, the fund receives franked dividends of $1400 with franking credits of $600 in respect to both parcel A and parcel B ($2800 franked dividends and $1200 of franking credits).

The result of the above transactions undertaken by the fund trustees, excluding brokerage fees, is:

- A cost of $1600, which is the difference between the proceeds from the sale of parcel A and the purchase of parcel B ($50,000 to $51,600), and

- Additional dividends of $1400 from parcel B.

Without the additional franking credits of $600 attached to the dividends on parcel B, the trades undertaken by the fund trustee would have resulted in a loss of $200. However, after undertaking these trades, the fund still holds the same number of shares in ZCF. Parcel B will be held by the fund for at least 45 days after the date of purchase.

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