On 30 April 2014 the ATO issued Taxation Determination TD 2014/10 entitled “Income tax: can section 177EA of the Income Tax Assessment Act 1936 apply to a ‘dividend washing’ scheme of the type described in this Taxation Determination?”
The answer given to the question posed is Yes. The application of Part IVA of the Income Tax Assessment Act 1936 to any particular scheme depends on a careful weighing of all the relevant facts and surrounding circumstances of each case. Without all relevant information, it is not possible to state definitively whether a provision in Part IVA applies to a particular scheme. However, the Commissioner’s view is that s 177EA will generally apply to a "dividend washing" scheme of the type described in this Taxation Determination.
The determination was previously released in draft as TD 2014/D1.
In a separate statement released on 30 April 2014, the ATO described dividend washing as arrangements that enable a taxpayer who effectively holds a single parcel of shares to obtain double franking credits. This occurs when an investor, who has access to the Special Market operated by the Australian Securities Exchange (ASX), sells shares ex-dividend (seller retaining the dividend with franking credits) and then buys cum-dividend shares in the same company on the Special Market (buyer receiving the dividend with franking credits).
The ATO says that the determination supports the ATO’s position that getting two sets of franking credits on what is essentially one parcel of shares is not allowed. The determination states that the franking credit anti-avoidance rule will generally apply to a dividend washing arrangement to deny the franking credit benefit on the second parcel of shares.
In May 2013, the government announced an integrity measure to further combat these types of arrangements with an intended date of 1 July 2013.
The determination follows the ATO’s warning in October 2013 that such schemes are not allowable.
Public consultation was undertaken on the draft ruling during early 2014 and more recently 3,000 letters were sent to taxpayers who may be involved in dividend washing arrangements.
The ATO has encouraged people to self-amend their tax returns with no penalty being imposed. This offer to all taxpayers has been extended until 28 May 2014. Taxpayers wishing to self-amend can call 1800 177 006.
For more information on dividend washing schemes go here, or call 13 28 61.
The ATO advises taxpayers who are unsure about their own circumstances to seek independent advice or apply for a private ruling from the ATO.