ATO hangs SMSFs out to dry on dividend washing

The ATO has written letters to more than 3,000 taxpayers, including many self managed superannuation funds, warning them to come clean on any "dividend washing" transactions that they may have been involved in, or to suffer the consequences.
Dividend washing may be deemed to have occurred where a taxpayer 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 says is effectively in their view, 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.
Early in 2013 we warned clients that the ATO considered such transactions were at risk of the existing anti-avoidance tax rules.  Later, the Government of the time announced in the May 2013 Federal Budget that dividend washing transactions would be banned from 1 July 2013 where a taxpayer was entitled to imputation credits of more than $5,000.
Federal Treasurer Joe Hockey announced in November last year that the Coalition Government would proceed with Labor's recommendation to close this "loophole" in order to claw back $60 million in tax over the next four years.  Draft legislation is circulating and has yet to be enacted but is still set to apply from 1 July 2013.
The ATO have however decided to flex their muscles on dividend washing that they believe occurred prior to the 1 July 2013 announced changes, offering taxpayers only 30 days to amend their income tax returns without penalty or to suffer the consequences of any ongoing ATO recovery action.
While many in the investment community maintain that the practice described as dividend washing was within the rules, it is now up to each affected taxpayer to quickly decide to repay these extra imputation credits, or run the gauntlet of further ATO action.
It appears the ATO is acting on annual dividend information reported by large companies. Instead of writing to your SMSF's tax agent, the ATO are writing directly to the registered shareholder's address which may be your home address, or that of your investment adviser or stock broker. from Hanrick Curran 
Posted by David Orth Real Wealth