The process, whereby ‘sophisticated’ investors effectively trade franking credits resulting in the potential for some to receive two sets of franking credits for the same parcel of shares, is “outside the intent” of the dividend imputation system, according to Treasury.
In response, the government has released a consultation paper outlining ways to address the issue, with the two-week consultation period closing on 17 June.
The problem arises because when shares are sold on an ex-dividend basis shortly after going ex-dividend then purchased on a cum-dividend (with dividend) basis, shareholders are effectively able to receive two sets of dividends, then claim two sets of franking credits.
Treasury outlined three potential legislative responses, which it says aim to prevent shareholders from receiving two sets of franking credits for the same effective parcel of shares while having negligible impacts on legitimate market activities with minimal additional uncertainty and complexity for taxpayers.
The first is a change to the holding period rules to address the break in ownership that is achieved through dividend washing.
This would ensure that when a shareholder sells ex‐dividend shares and then purchases shares with a dividend (cum‐dividend shares) in the same company, the purchase of the cum‐dividend shares would be taken to have occurred immediately before the shares went ex‐dividend.
A benefit to this approach is that the holding period rules are self‐executing, and would therefore provide taxpayers with a high level of certainty, Treasury stated.
The second approach involves adding a criterion to the anti‐avoidance provisions, allowing the commissioner to take into account the timing of trades when determining whether a franking credit should be claimable.
This has the benefit of being adaptable to future schemes, but as a standalone approach would result in “considerable uncertainty” and would not be self‐executing, resulting in significant compliance costs for taxpayers and administration costs for the Australian Taxation Office, Treasury stated.
The third option is to create a specific double franking credit integrity rule that would be inserted into the anti‐avoidance provisions.
This would ensure that when a shareholder sells an ex‐dividend share after it goes ex‐dividend and then purchases a cum‐dividend share before the record date, only one set of franking credits could be claimed.
