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The ATO has warned it is looking into entities that raise new capital to fund franked distributions and release accumulated franking credits to shareholders.
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ATO issues dividend scheme warning
08 May 2015
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8 minute read
Deputy Commissioner Tim Dyce said the ATO believes these arrangements are being entered into by companies with accumulated franking balances to release franking credits that they otherwise would have retained.
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In a typical case, the ATO said it has observed companies issuing rights to shareholders and using funds raised to make franked distributions via special dividends or an off-market share buyback.
These arrangements are distinct from ordinary dividend reinvestment plans involving regular dividends.
“The distributions are unusually large compared to ordinary dividends and occur at a similar time, and in a similar amount, to the capital raised,” Mr Dyce said.
“So a potentially large amount of franking credits is released with minimal net changes to the company’s economic position. There is also minimal impact on the shareholders, except in some cases they may receive refunds of franking credits and in the case of buybacks they may also get improved capital gains tax outcomes.”
The ATO considers that these arrangements may not be compliant with tax law, in particular the general anti-avoidance provisions. Therefore, there may be adverse implications for shareholders and companies involved in these arrangements.
“In addition to working with taxpayers in recent cases, we are engaging with key large business stakeholders on the arrangement and will work with affected taxpayers to help them comply with the law,” Mr Dyce said.
The ATO said taxpayers who have entered into, or are contemplating entering into, an arrangement similar to this are encouraged to discuss their situation with the Tax Office now.
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