In the Budget, the Government announced it would close a loophole that enables sophisticated investors to engage in “dividend washing” (although known as dividend double-dipping). Currently, sophisticated investors can engage in “dividend washing” to, in effect, trade franking credits. This can result in some shareholders receiving two sets of franking credits for the same parcel of shares. This is outside the intent of the dividend imputation system.
The Government will consult on the development of the legislation.
Key features – The Government said it will seek to ensure that when an investor engages in “dividend washing” by selling shares ex-dividend and then immediately buys equivalent shares which still carry the right to a dividend (known as cum-dividend shares), they will only be entitled to claim one set of franking credits. The changes will be targeted to the 2-day period after a share goes ex-dividend.
The Government said it intends to close this “loophole” by making changes to the holding period rules, which generally require stakeholders to hold a share at risk for 45 days in order to gain access to franking credits attached to dividends paid on the share.
In particular, the Government said it would consider modifying the “last-in-first-out” rules, to ensure that shares bought in the above circumstances are treated as one parcel of shares. “The amendments will be targeted at the identified abuse”, the Assistant Treasurer said.
The proposed changes would only apply to investors that have franking credit tax offset entitlements in excess of $5,000.
Mr Bradbury indicated that the Government was “open to alternative approaches” to prevent dividend washing and would consult with business to ensure “that the best legislative response” was implemented.
Treasury will release a discussion paper in late May 2013 on the proposed changes.
Date of effect – The measure will apply from 1 July 2013.
Source: Budget Paper No 2 [p 36]; Assistant Treasurer’s press release, 14 May 2013
[WTB 20, 14/5/13]