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Dr. Mark Sinclair
Dr. Mark Sinclair, Mentor Education

New dividend washing tax rule targets investors.

3 February 2014

The ATO has released a draft ruling on the practice of dividend washing that could have an impact on superannuation funds including SMSFs and large institutionally managed funds.

The Government and the ATO will combine resources to close a taxation loophole that enables sophisticated investors to engage in ‘dividend washing’ and effectively trade franking credits.

The practice of dividend washing enables investors who sell a share in the
ex-dividend market, where they are entitled to one franked dividend and then immediately buy the share in a special market provided by the ASX for another, to be entitled to a second dividend. This practice effectively allows some shareholders to receive two sets of franking credits for the same parcel of shares.

The ATO released draft ruling outlines the ‘retrospective’ crackdown (an extension of general anti-avoidance provision, known as Part IVA), and SMSFs and large institutionally managed funds could effectively be asked to pay back some of the money garnished using the strategy that would apply retrospectively from July 1 2013.

In October 2013 the ATO said dividend-washing trades was not legal and the recent ruling will allow tax commissioner Chris Jordan much greater power to pursue those who have engaged in the practice.

Treasurer Joe Hockey said that by closing the loopholes in the tax system that allows dividend washing, his Government will raise around $60 million in revenue over four years.

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