I'm Grant Wardell-Johnson, I lead the Australian Tax Centre, and I am here today with Jeremy Hirschhorn, who is head of our international tax practice. Jeremy in the budget last year, there was reference to ‘Dividend Washing’ and the government was going to introduce rules to attack dividend washing, what’s that all about?
Yeah so Grant dividend washing is a particular trading strategy, which involved you hold a share, you sell the share in the ex dividend market, so you’re entitled to one frank dividend, and then instantaneously you buy the corresponding share, the same share in a special market offer by the ASX, the dividend special market, and that entitles you to a second bite of the cherry, another dividend, another frank dividend, on the same share. So ultimately for a small loss in the market, there's genuinely an arbitrage on the price, you get two franking credits. So that drives an extra return, particularly for superannuation fund or pension fund investors.
So what's the government and possibly the ATO doing in relation to this?
Yeah so as you said Grant, last year in the budget, the strategy in the sense got too known and was too popular, the government announced that it would shut down the strategy prospectively. What's happened more recently is that the tax office has issued a media release saying that it never thought the strategy worked, not withstanding a couple of private rulings, and that it is going to seek to retrospectively apply the general anti-avoidance rules, and it is seeking voluntary disclosure. So it's seeking people that participated in the strategy to come forward.
So what should companies be doing in relation to dividend washing now?
Yeah so this is a really good question because in our experience many organisations actually don't realise that they have been participating in that strategy or encouraging that strategy directly or indirectly. So where we have seen it is in private banks, private brokers, have been facilitating the strategy, sometimes passively implementing the strategy, and so those organisations may have an exposure. Fund managers can often be caught up in this where they can have a fund-to-fund or manager of managers model, or underlying mandates, particular those where is an incentivisation to increase franking credits, underlying managers have implanted the strategy, perhaps again unwittingly for the manager in the middle, ultimately to the benefit of their investors, but those fund managers are potentially the piggy in the middle.
So what we're saying to organisations is, you should be out there doing a bit of a forensic exercise to work out whether you have participated directly or indirectly in the strategy, or encouraged the strategy, to quantify the potential exposure, and certainly to start those internal risk discussions.