Appendix 1: Dividends
An imputation system applies for taxing dividends paid by franking entities. Certain dividends (including non-share dividends) paid by franking entities, which have paid Australian tax may have a franking credit attached. These dividends are known as franked dividends.
If the shares or interests are not held at risk as required under the holding period and related payments rules, or the dividend washing integrity rule applies, or there is other manipulation of the imputation system, do not include the Australian franking credit in assessable income, and there is no entitlement to a franking tax offset.
The Australian Government has rules, administered by us, to allow New Zealand companies to join the Australian imputation system. The New Zealand Government has similar rules, administered by the New Zealand Inland Revenue Department, to allow Australian companies to join the New Zealand imputation system. Subject to full compliance with the Australian imputation rules, a New Zealand company that has chosen to join the Australian imputation system is able to maintain an Australian franking account and may pay dividends franked with Australian franking credits.
For dividends paid by Australian franking companies, the total amount of dividends received or credited and the franking credit is included in the assessable income of the partnership to determine the relevant net income or loss.
For dividends paid by New Zealand franking companies, the amount of the dividend received or credited and the franking credit included in the assessable income of the partnership can vary depending on whether or not the dividend is assessable. See the Foreign income return form guide 2015–16 to work out whether the dividend is assessable income.
If the dividend from the New Zealand company is assessable, you must declare it (including any supplementary dividend) as assessable foreign income, even if dividend withholding tax was deducted in New Zealand. Each partner may be entitled to a foreign income tax offset in respect of some or all of any New Zealand withholding tax paid on the dividend.
If the franked dividend from the New Zealand company is included in assessable income, the amount of the Australian franking credit on that dividend is also assessable income and you can claim a tax offset equal to that amount (subject to the exceptions described below).
If the recipient is entitled to a tax offset under section 207-45, the Australian franking credit is included in the assessable income of the recipient. The tax offset is reduced by the relevant amount of a supplementary dividend paid by the New Zealand company if:
- the supplementary dividend is paid in connection with the franked dividend
- the franked dividend and the supplementary dividend flow indirectly to the recipient because the recipient is a partner in a partnership
- the recipient (each partner in the case of a partnership) is entitled to foreign income tax offsets because of the distribution.
Australian resident shareholders are not entitled to a tax offset for New Zealand imputation credits which are attached to dividends paid by a New Zealand company. Australian resident shareholders are only entitled to a tax offset for Australian franking credits which are attached to those dividends.
Franking credit trading
For the franking credits to flow through to the partners, both they and the partnership must be qualified persons for the dividend.
To be a qualified person for a dividend, a taxpayer must, during the relevant ‘qualification period’ (see below), hold the shares, or an interest in the shares, at risk for 45 days (90 days for certain preference shares), not counting the days on which the shares or interests were acquired or disposed of. This is sometimes referred to as the ‘holding period rule’.
To hold the shares, or an interest in shares, at risk, the taxpayer must carry at least 30% of the risks of loss and opportunities for gain associated with the shares, or interest in the shares.
If the taxpayer does not have an obligation to make a payment for a dividend (generally one passing the benefit of the dividend to another) the relevant qualification period for that dividend is the period beginning the day after the relevant shares or interests are acquired, and ending 45 days (90 days for certain preference shares) after the shares go ex-dividend. Otherwise, if the taxpayer is obliged to make, has made, or is likely to make a related payment, the relevant qualification period is the period beginning 45 days (90 days for certain preference shares) before the shares go ex-dividend and ending 45 days (90 days for certain preference shares) after the shares go ex-dividend. This is sometimes referred to as the ‘related payments rule’.
The holding period rule applies to shares acquired on or after 1 July 1997 (unless acquired under a contract entered into before 7.30pm Australian eastern standard time (AEST) on 13 May 1997) and the related payments rule applies to arrangements entered into after 7.30pm AEST on 13 May 1997.
Alternatively, a partner can be a qualified person if they are an individual and their total franking credit entitlements do not exceed $5,000.
Dividend washing integrity rule
The dividend washing integrity rule prevents you from claiming franking credits where you have received a dividend as a result of dividend washing.
Dividend washing occurs where you, or an entity connected to you, claim two sets of franking credits by:
- selling shares that are held on the Australian Securities Exchange (ASX) and have become ‘ex-dividend’, and then
- purchasing some substantially identical shares using a special ASX trading market.
When the dividend washing integrity rule applies, you are not entitled to claim the franking credits for the second dividend. However, if your interest in the second parcel of shares exceeds the interest in the first parcel, you may be entitled to claim a portion of the franking credits for the additional shares. For more information, see ato.gov.au/dividendwashing
General anti-avoidance rule
Section 177EA of the ITAA 1936 is a general anti-avoidance rule against franking credit trading and streaming. The rule applies where a more-than-incidental purpose of certain arrangements is to obtain a tax advantage for franking credits.
For more information, see You and your shares 2015–16. (NAT 2632).
The franking credit from Australian franking entities is shown at:
- M item 12 if received directly from a paying company
- D item 8 if received indirectly through another partnership or trust.
Do not show the franking credit if the partnership was not a qualified person or the partnership was otherwise unable to claim a franking credit for the dividend.
Australian franking credits from a New Zealand franking company
The Australian franking credits attached to franked dividends received directly or indirectly from a New Zealand franking company are shown at D item 23. For credits received indirectly through another partnership or trust, do not show the franking credit if the partnership was not a qualified person or the partnership was otherwise unable to claim a franking credit.
Show expenses claimed against earning dividend income at item 16 Deductions relating to Australian investment income.
The share of the partnership’s net income or loss distributed to a resident partner is shown on the partner’s own tax return.
If that share includes some or all of the franked dividends paid to the partnership, the partner who is a resident individual is entitled to a tax offset equal to their share of franking credits attached to the franked dividends, undiminished by the expenses of the partnership.
For the franking credits to flow to a partner, both the partner and the partnership must be qualified persons (satisfying the holding period and related payments rules).
Non-resident partners are not liable to pay any Australian tax on the franked amount of dividends. Unfranked dividends and the unfranked part of franked dividends, if any, are subject to withholding tax.
Traders of shares (including non-share equity interests) who operated as a partnership and received dividends during the income year must show them at item 12.
Keep supporting records if the partnership claims the whole or part of any dividend, bonus share issue or other distribution is exempt from tax, for example, because FTDT has been paid on the amount.
Foreign source dividends
Foreign source dividends (other than dividends from a New Zealand franking company) are not subject to the imputation rules. However, they are usually included in the assessable income of the partnership. If the partnership receives foreign source dividends, other than dividends that qualify as non-assessable non-exempt income under sections 23AI and 23AK, include these amounts at item 23.
An unfranked dividend includes the unfranked part of a partly franked dividend.
Unfranked dividends and the TOFA rules
The TOFA rules may apply to some or all of the unfranked dividends that a partnership receives. Where this is the case, such amounts are still shown at item 12 Dividends and must also be shown at item 31 Taxation of financial arrangements (TOFA).
Dividends or interest paid to non-residents
Interest paid includes amounts in the nature of interest. If the partnership paid or credited any amounts in the nature of interest to a non-resident of Australia or has received unfranked dividends or interest on behalf of a non-resident of Australia, provide a statement showing the amount paid, credited or received on behalf of the non-resident and whether withholding tax was deducted. If it was not deducted, state why. Attach the statement to the tax return. Print X in the Yes box at Have you attached any ‘other attachments’? at the top of page 1 of the tax return.
Last modified: 10 Aug 2016QC 48217