Self-managed superannuation fund (SMSF) specialist Aaron Dunn has warned that a draft determination issued by the Australian Taxation Office (ATO) has served to change the ability of funds to extract double franking credits from dividends in companies listed on the Australian Securities Exchange.
Dunn said the draft determination (TD 2014/D1) had put in question the practice known as "dividend washing", with the ATO now holding that such arrangements are subject to Part IVA of the Tax Act.
He said the ATO had highlighted within its draft determination that it believed the double franking credits obtained for the process of dividend washing were being achieved by "more than an incidental purpose in entering into or carrying out the scheme".
Dunn said a case study provided by the ATO accompanying its draft determination had suggested the only advantage to paying a premium on the cum-dividend shares via a Special Market was to obtain the right to additional dividend and franking credits.
"It is quite apparent that timing of the transaction is very precise to obtain a tax benefit, and the trustee is driven by tax considerations and is not akin to an ordinary trade," he said. "For a super fund trustee, the franking credit benefit obtained could be anywhere from 15 per cent in accumulation phase up to 30 per cent when paying pensions."
Dunn said it was now open to the Tax Commissioner to make a determination that no imputation benefit was to arise from such transactions.
