Measures to minimise exploitation of franking credits by ‘dividend washing’

Budget Review 2013–14 Index

Bernard Pulle

In the 2013–14 Budget, the Australian Government announced that it will close a loophole that enables sophisticated investors to engage in ‘dividend washing’ which results in two sets of franking credits being claimed on what is effectively the same parcel of shares in publicly listed companies. The gains to revenue are estimated at $60 million spread equally over the forward years 2014–15, 2015–16 and 2016–17.[1]

In a media release on the Budget, the Assistant Treasurer and Minister Assisting for Deregulation, outlined further details of the proposed measures to prevent ‘dividend washing’, the reasons for the proposed changes and the consultation that will take place based on a discussion paper that will be released in late May 2013.[2]

What is ‘dividend washing’?

‘Dividend washing’ refers to transactions where  investor X who holds a parcel A of shares in a listed public company Z sells those shares just before it goes ex-dividend (the right to the dividend and any franking credits remains with the seller). Investor X immediately purchases another parcel B of shares in company Z, equivalent to the shares in A, in the cum-dividend market (the right to the dividend and any franking credits remains with the buyer). Historically, a rule of the market has allowed a two-day period for settlement of option trades which has been exploited by sophisticated investors to buy shares which carry a dividend to claim two sets of franking credits.

Under current tax law, investor X could claim franking credits in relation to the shares in A as well as franking credits in relation to the shares in B. The measures proposed in the budget will result in investor X being able to claim only one set of franking credits. The Budget paper also indicated that the proposed changes will target the two-day period after a share goes ex-dividend.

Outline of methods to close the loophole

The media release indicated that the Australian Government will consider the following changes to close this loophole:

  • changes to the holding period rules where shareholders are required to hold a share at risk for 45 days in order to gain access to franking credits attached to dividends paid on the share and
  • modification of the ‘last-in first out’ rules to ensure that the shares bought in the ‘dividend washing’ operations are treated as one parcel of shares.

The proposed changes will only apply to investors that have franking credit tax offset entitlements in excess of $5,000, so that the typical ‘mum and dad’ investors will not be affected by the proposed changes.

Justification for the changes

The justification for these changes (according to the media release) is maintenance of the integrity of the imputation system where the intention was that franking credits should only benefit the true economic owners of shares and ensure that franking credits are only available to shareholders in proportion to their shareholdings.[3]

The media release also refers to an aspect of  ‘dividend washing’, where shareholders who may not be entitled to claim franking credits, ‘trade’ their franking credits to other shareholders who can. For example, non-residents of Australia cannot use any franking credit attached to franked dividends to reduce the amount of tax payable on other Australian income and cannot get a refund of the franking credit. The franked amount of dividends paid or credited to non-residents is exempt from Australian income and withholding taxes.[4] The ‘dividend washing’ operation presents opportunities for non-residents to ‘trade’ their franking credits to residents who could claim the franking credits.

The media release concludes by asserting that eliminating large scale ‘dividend washing’ will support investment by improving the efficiency and integrity of the tax system.



[1].       The budget figures in this brief have been taken from the following document unless otherwise sourced: Australian Government, Budget measures: budget paper no. 2 2013–14, p. 36, accessed 16 May 2013.

[2].       D Bradbury (Assistant Treasurer and Minister Assisting for Deregulation), media release, 14 May 2013 Protecting the corporate tax base from erosion and loopholes – measures and consultation arrangements, Attachment F, pp. 16—17, accessed 16 May 2013.

[3].      Ibid.

[4].      Australian Taxation Office, You and your shares 2011–12: Dividends paid or credited to non-resident shareholders, accessed 16 May 2013.

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