“Dividend washing” arrangements

The law contains an integrity measure to prevent sharemarket investors from engaging in “dividend washing”. Dividend washing results in two sets of franking credits being claimed on what is effectively the same parcel of shares in publicly listed companies.

The arrangement being targeted by the government can be illustrated as follows:

  • Investor X holds parcel A of shares in a listed public company Z. The investor sells those shares just before they go ex-dividend (the right to the dividend and any franking credits remains with the seller).
  • Investor X immediately purchases another parcel B of shares in company Z, equivalent to the shares in A, in the cum-dividend market (the right to the dividend and any franking credits remains with the buyer).

Historically, a rule of the market has allowed a two-day period for settlement of option trades, which has been exploited by sophisticated investors to buy shares that carry a dividend to claim two sets of franking credits.

From July 1, 2013, the integrity rule is activated during the period between the dividend date and the record date of a membership interest, where a membership interest is disposed of on an ex-dividend basis and a substantially identical membership interest is acquired cum-dividend. The rules will deny franking benefits in respect of the newly acquired shares.

This only applies to investors that have franking credit tax offset entitlements in excess of $5,000, so not a lot of the typical “mum and dad” investors may be affected.

See the ATO’s comprehensive coverage on dividend washing here.

“Dividend washing” arrangements