In 2015 the ATO issued a warning to Self-Managed Superannuation Funds (SMSFs) involved in arrangements to maximise claims for franking credits from private companies.
The ATO has now recently published an “Offer to Self-Managed Superannuation Fund (SMSF) trustees to address dividend stripping arrangements.”
The original details of the ATO’s warning were included in Taxpayer Alert TA 2015/1 – dealing with arrangements where a private company with accumulated profits was channelling franked dividends to a SMSF instead of to the company’s original shareholders. As a result, the original shareholders were able to escape tax on the dividends and also benefit as members of the SMSF from franking credit refunds to the SMSF.
The ATO was concerned that contrived arrangements were being entered into by individuals (typically SMSF members approaching retirement) so that dividends subsequently flowed to, and were purportedly treated as exempt from income tax in, the SMSF because the relevant shares were supporting pensions. The intention was for the original shareholders of the private company and/or their associates to avoid “top-up” income tax on the dividend income; and for the SMSF to receive a refund of the unused franking credit tax offset, which is available for tax free distribution to its members. This arrangement was considered to have features of dividend stripping which could therefore lead to the ATO cancelling any tax benefit for the transferring shareholder and/or denying the SMSF the franking credit tax offset.
A link to the detailed Taxpayer Alert – TA 2015/1 can be found here
The ATO’s main concerns were that:
- the franked dividends received by the SMSF may be part of a dividend stripping operation under s 207-145(1)(d) of ITAA 1997;
- the arrangement may be a scheme by way of or in the nature of, or have substantially the effect of, dividend stripping to which s 177E of ITAA 1936 applies;
- the arrangement may be a scheme to obtain imputation benefits to which s 177EA of ITAA 1936 applies; and
- the arrangement may also give rise to non-arm’s length income for the SMSF under s 295-550 of ITAA 1997.
Follow up Offer:
The ATO have advised that in the next few months, they will contact SMSF trustees who may have implemented the types of dividend stripping arrangements described in Taxpayer Alert – TA 2015/1 in the income tax years ended 30 June 2011 to 30 June 2015.
The ATO are offering trustees the option to either self-amend relevant SMSF annual returns (SARs) or to contact the ATO to make a voluntary disclosure to correct the tax position resulting from such arrangements.
Under the Offer, the ATO will accept a self-amendment that involves the SMSF amending their previous SARs to remove the franking credits claimed on private company dividends received as part of the arrangement.
Provided they act by 15 February 2016, trustees who have implemented an arrangement substantially similar to the one described in TA 2015/1 and who choose to self-amend won’t be subject to administrative penalties. However, interest charges may apply.
A link to the ATO’s Offer can be found here https://www.ato.gov.au/Super/Self-managed-super-funds/In-detail/News/Offer-to-SMSF-trustees-to-address-dividend-stripping-arrangements/
Whilst receiving private company dividends and substantial franking credits is not necessarily indicative of the implementation of an arrangement similar to Taxpayer Alert – TA 2015/1, we are advising all clients of this Offer so that you can take the opportunity to review your own SMSF and carefully consider whether this Offer needs to be considered having regard to your individual circumstances.
Please contact your Blaze Acumen adviser if you have any questions in relation to the above matters and your SMSF.