Australia

Details

  • Service: Tax, Corporate Tax
  • Industry: Financial Services
  • Type: Regulatory update
  • Date: 15/01/2014

Tax Insights

KPMG's analysis of tax issues and developments.

Julian Humphrey

Julian Humphrey
Head of Tax, Banking Sector

+61 2 9335 7682

jrhumphrey@kpmg.com.au

Dividend Washing reaches the spin cycle 

by Julian Humphrey, Financial Services Specialist

The Australian Taxation Office (ATO) has today released Draft Taxation Determination 2014/D1 which considers the application of Part IVA to dividend washing schemes. A dividend washing scheme involves the disposal of a parcel of shares ex-dividend and then immediately reacquiring an equivalent parcel cum dividend, so that the dividend (and franking credits) is received on both parcel of shares.

The Draft Determination concludes that “the Commissioner’s view is that section 177EA will generally apply to a ‘dividend washing’ scheme.” The Draft Determination, when finalised, will apply to arrangements entered into both before and after its date of issue.

 

Whilst the position reached in the Draft Determination is not unreasonable, it is in contrast to that taken by the Commissioner in at least one private ruling published early last year (Authorisation Number 1012404629592) where the Commissioner concluded that the “relevant circumstances of the scheme indicate that there is no requisite purpose of conferring an imputation benefit under the financial arrangement”.

 

The 2013 Budget included an announcement that the tax law would be amended from 1 July 2013 to prevent dividend washing. This was presumably the result of advice (from the ATO) that the existing anti-avoidance rules were not sufficient to prevent investors receiving the additional imputation benefits from the dividend washing trades. The announcement also gave investors some comfort that trades up to 30 June 2013 were in accordance with the taxation law.

 

However, investors that have pursued this trading strategy on the basis of the Commissioner’s position in the private rulings and the 2013 Budget announcement are now fully exposed to the potential of interest and penalties for trading prior to 30 June 2013. This highlights the risk of relying on published private binding rulings.

 

A press release on 3 October 2013 foreshadowed the ATO position when Bruce Quigley was quoted as saying 'The ATO believes dividend washing trades are not allowable under the tax law'. The press release notes that taxpayers who make a voluntary disclosure of these trades before they are contacted by the ATO will be entitled to a reduction in penalties. The ATO also indicated at this time that it had access to information 'which will identify those involved in dividend washing'.

 

Importantly, however, the exposure is not limited to those directly undertaking dividend washing trades. Investors in managed funds that have undertaken these trades, or that have themselves invested in other funds that have engaged in dividend washing, face the potential of previously reporting franking credits being denied as a result of ATO compliance activity.

 

Finally, the ATO has recently commenced risk reviews of market participants focussing on dividend washing trades. It is clear that where participants have facilitated trades on behalf of clients the ATO will be looking to apply the promoter penalty laws.

 

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