The ATO warned it is reviewing certain structured arrangements that involve the transfer of shares around the shares’ ex-dividend date.
“We are concerned these arrangements involve taxpayers inappropriately receiving franking credits in breach of rules designed to maintain the integrity of the imputation system,” said the ATO.
According to Taxpayer Alert (TA) 2018/1:
The arrangements involve an Australian taxpayer with a long position in Australian shares legally acquiring, but having little or no economic exposure to, an additional parcel of the same shares and holding those shares over the ex-dividend date. They will typically involve the use of securities lending arrangements in combination with, repurchase agreements or derivative contracts (contracts), to create what is essentially a circular flow of shares. Although the Australian taxpayer has no or only nominal economic exposure to the additional parcel of shares on a stand-alone basis, the Australian taxpayer claims franking credits in respect of both the existing long position and the additional parcel of shares.
Though, “this Alert does not apply to isolated securities lending transactions or derivative contracts that a taxpayer may enter into in connection with an existing parcel of shares.”
“It is only intended to apply where the purported combined effect of entering into one or more such transactions is the entitlement of the taxpayer to the benefit of franking credits where they have no or nominal exposure to an additional parcel of shares, as outlined in this Alert.”
The ATO says these arrangements have typically been marketed to large investors such as equity funds and large superannuation funds, but also wanted to bring it to the attention of SMSF trustees and professionals “to help prevent the spread of such arrangements, and so you can make informed decisions”.
For taxpayers who have entered such arrangements, or are considering doing so, the ATO recommends they seek independent professional advice, review their arrangements and discuss their situation with the ATO.