By Chris Campbell
In our last bulletin, we advised clients that the ATO had written to many self managed superannuation funds (SMSFs) warning them to come clean on any "dividend washing" transactions that they may have been involved in, or to suffer the consequences.
Briefly, "dividend washing" may be deemed to have occurred where a SMSF sells a parcel of listed shares once a dividend has been declared "ex-div", then immediately purchases the same number of shares on a special "cum-div" market created primarily to service the needs of foreign investors. In this case, two sets of franking credits are claimed on what the ATO maintains was effectively the same parcel of shares.
The strategy benefited many superannuation funds particularly those paying pensions which pay no tax on investment earnings and receive a full refund of imputation credits on franked dividends.
"even if you did not receive an ATO warning letter, your SMSF may be subject to any ATO recovery action, and trustees should consider availing themselves of the amnesty"
The ATO have announced that they are expecting to finalise their Taxation Determination TD 2014/D1 over the next few weeks. That draft determination deals with the ATO position that dividend washing transactions prior to 1 July 2013 are, in their opinion, caught by the anti-avoidance provisions of Part IVA of the Income Tax Assessment Act 1997.
Along with the determination comes an ATO offer of amnesty from penalties for SMSFs and other involved taxpayers who voluntarily amend their annual tax returns no later than 28 days from the date of the ruling's finalisation. The amnesty will be available for dividend washing transactions that may have occurred in the 2011, 2012, and 2013 financial years.
If you are unsure whether or not your SMSF engaged in dividend washing we recommend that you contact your investment adviser or stock broker immediately. Even if you did not receive an ATO letter, your SMSF may be subject to any ATO recovery action, and trustees should consider availing themselves of the amnesty.
If your broker or adviser confirms dividend washing did in fact occur or is unsure, then we recommend that you contact us as soon as possible so that we can conduct a review of your SMSF records as follows:
- Examine your SMSF investment ledgers, records and archives for possible dividend washing transactions that may have occurred during the last 3 financial years;
- Advise you of our findings and the details of any proposed tax return amendments;
- Prepare amendments for your SMSF income tax & annual returns for any affected years;
- Lodge these amendments with the ATO by the amnesty due date
- The ATO will then issue amended assessments for each financial year in due course which we will check and forward to you for payment.
The additional tax assessed will essentially be equivalent to handing back the dividend imputation credits previously claimed on the "cum-div" shares purchased as part of a washing transaction. Although the ATO amnesty says it will waive penalties for voluntary disclosure, you can expect that the ATO may attempt to recover General Interest Charges (GIC) based on the difference between the time of the amended assessment and the original lodgement date of your SMSF income tax returns.
With only 28 days to amend income tax returns once the draft taxation determination is finalised, a potentially significant amount of review work may be required to identify the affected transactions so time is of the essence.