The arrangement has features substantially equivalent to the following:

The taxpayer owns a parcel of ordinary shares in an Australian listed company for at least 45 days (Parcel A).

The Company announces a franked dividend.

The taxpayer sells Parcel A on the ordinary share market but retains the right to the franked dividend.

Shortly afterwards the taxpayer repurchases a further parcel of ordinary shares of the same or similar value in the Company (Parcel B). The Parcel B shares purchased include a right to receive the franked dividend.

Parcel B is purchased on a Special Market operated by the ASX. These shares may also trade at a premium which reflects the value of the dividends and franking credits to investors. The seller of Parcel B shares is forgoing the franking credit that they may be unable to use.

The taxpayer may make a loss when they sell Parcel A, and subsequently purchase Parcel B.

The only reason for the sale of Parcel A and the subsequent purchase of Parcel B is to access the franking credits attached to the dividend declared on the Parcel B shares.

The taxpayer holds Parcel B for at least 45 days.

The taxpayer receives the dividends and franking credits on both Parcel A and Parcel B and is able to make full use of the franking credits.

This arrangement may appear particularly beneficial where the tax payable on the two sets of dividends is less than the combined franking credits.

The diagram below demonstrates the arrangement:Diagram demonstrating the arrangement

The arrangement is ineffective

The Commissioner is of the view that the arrangement is ineffective as the Commissioner can apply paragraph 177EA(5)(b) of ITAA 1936 (anti avoidance provision) to deny the whole, or any part, of the franking credits received on either, or both Parcels of shares, on the basis that the arrangement is a scheme entered into for the purpose of obtaining franking credit benefits. Indeed, it may be the case that the arrangement is entered into solely for that purpose.

The ATO also considers that arrangements of this type give rise to additional issues:

franking credits (tax offsets) may not be available as the taxpayer may not be a qualified person for the purposes of the franking credit rules in the former Division 1A of Part IIIAA of the ITAA 1936 and Subdivision 207-F of the ITAA 1997;

the anti-avoidance provisions in Part IVA of the ITAA 1936 may apply to deny tax benefits that arise as a result of the taxpayer entering into the arrangement including any deduction or capital loss that is claimed under the arrangement.

Last modified: 06 Mar 2015QC 37333