by Olivia Long

Many SMSF Trustees recently received a letter from the Australian Taxation Office (ATO) in relation to participation in franking credit arrangements.

We appreciate the ATO correspondence has come as a shock to many, especially in light of the fact that during the May 2013 budget Treasury issued a media release entitled Preventing Dividend Washing to insert an integrity rule into the ITAA 1997 which would close a loophole that enabled sophisticated investors to engage in ‘dividend washing’ from 1 July 2013. The media release made no mention of applying any laws regarding ‘dividend washing’ retrospectively so one may imply the practice was permitted prior to 1 July 2013.

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 measure will ensure that when an investor engages in ‘dividend washing’ by selling shares with a dividend and then immediately buying equivalent shares that still carry a right to a dividend, they will only be entitled to one set of franking credits.

The ATO however, are now using their powers under Part IVA of the ITAA 1936 (anti avoidance provisions) to claw back the second set of franking credits retrospectively.

SMSF trustees have been given a deadline of 24th April 2014 to amend tax returns where necessary.

If tax returns are amended by the due date, a penalty will not be applied and trustees will receive a new notice of assessment advising the tax payable and payment due date.

If they do not receive a response by the due date, the ATO may take further compliance action that could result in an audit. Penalties may apply in relation to amendments that result from audit activity.

We encourage trustees in this situation to contact an SMSF specialist, as advice may be prudent and an extension on this deadline can be granted if dealing with a tax agent.