Maximising Your Investment Yield or Dividend Washing ?
Maximising your investment yield by buying and selling your shareholdings at the correct time is one of the basic strategies a lot of investors use. However, as you maybe aware, legislation is set to be introduced to prevent a particular buying and selling arrangement that in some circles had become standard practice as part of increasing yields from investments.
Essentially, the practice (known as dividend washing) involved selling and buying back similar parcels of shares within a specified period (a “special trading period”). The effect of the transactions was to provide the taxpayer with two dividends and two lots of franking credits on essentially a single shareholding.
The diagram below demonstrates the arrangement:
As part of plugging the budget deficit, the ATO has gone on the offensive in relation to these types of arrangements and is issuing notifications to taxpayers they believe to have participated in a dividend washing arrangement. The ATO is requesting that taxpayers go back and amend their respective returns for the relevant prior years on the basis that they were never effective by way of application of the general anti-avoidance legislation. If an amendment request is not received the ATO state that additional compliance activity is likely (i.e. they will conduct an audit) and would seek to impose penalties.
Commonly, a dividend washing arrangement was undertaken by low taxed individuals or superannuation funds. Often, brokers would use this strategy as a way of increasing the yield on a holding, however, the actual owner of the shares may not be aware of the arrangement. Therefore a closer review of your returns from your investments may be warranted.
If you or your superannuation fund receive a notification from the ATO then timely action is required to avoid the potential commencement of audit activity or imposition of penalties. Should you have any questions on how to approach the ATO notification please contact your ESV engagement partner on 02 9283 1666.
Article by David Prichard