Global Tax Alert | 25 March 2014

Australia releases dividend washing integrity changes exposure draft legislation for comment

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Australia's Treasury released exposure draft legislation (ED), together with accompanying explanatory materials, on 24 March 2014 concerning the previously announced proposals to amend the income tax law to prevent “dividend washing.” The measure was listed as ”to proceed” on the Government's 6 November 2013 announced but not enacted measures list.1

Dividend washing is said to allow an entity to obtain multiple franking credit entitlements in respect of a single underlying economic interest. To dividend wash, an entity sells an interest shortly after becoming entitled to receive a fully franked distribution in respect of that interest, then shortly after purchases a new and substantially identical interest that also provides an entitlement to another fully franked distribution.

This draft legislation would amend the tax law to deny an entity the benefits of any additional franking credits that an entity receives as a result of dividend washing, with retrospective effect from 1 July 2013.

This law change is being made in parallel with continuing Australian Taxation Office (ATO) action to attack dividend washing arrangements by applying the current Part IVA dividend franking credit anti-avoidance rules (s177EA ITAA36), with retrospective as well as prospective effect. A draft TD 2014/D1 was issued on 15 January 2014. So the ATO Part IVA attack is inconsistent with the commencement date of the ED.

The Australian Financial Review reported on 24 March that the ATO has commenced sending letters to fund managers, stockbrokers and sophisticated investors warning them that they may be the target of an ATO review, and demanding they come forward to voluntarily amend returns in relation to their dividend washing activities.2


Superannuation funds, income tax exempt entities including charities and “sophisticated” investors as well as private bankers and investment managers must review the proposed law changes to assess how their current equity trading practices might be impacted (if they have not already modified their behaviors in light of the announcement and the ATO's draft TD). In addition, custodians and other administrators will need to consider how tax policies may be impacted as well as how they may need to incorporate the final rules into their compliance testing systems. Taxpayers must also consider how they may be impacted by the ATO's views and their compliance action.

Comments are requested by 14 April 2014.


1. For additional information, see EY Global Tax Alert, Australia issues plan for tax announcements backlog, issued 7 November 2013.

2. See article, ATO threat over share trading, 24 March 2014, The Australian Financial Review AFN, page 1.

For additional information with respect to this Alert, please contact the following:

Ernst & Young (Australia), Brisbane
  • John Seccombe
    +61 7 3243 3669
Ernst & Young (Australia), Melbourne
  • Peter J. Janetzki
    +61 3 8650 7525
Ernst & Young (Australia), Perth
  • Mathew Chamberlain
    +61 8 9429 2368
  • Craig Robson
    +61 8 9429 2271
Ernst & Young (Australia), Sydney
  • Daryn Moore
    +61 2 9248 5538
Ernst & Young LLP, Australian Tax Desk, New York
  • Michael Anderson
    +1 212 773 5280

EYG no. CM4293