Wrong way on divi washing
Treat the loan of an asset as a capital gains tax event.
The Australian Taxation Office's latest ruling to outlaw dividend washing is unlikely to be effective other than to add to red tape and the complexity of our tax system. The former government was correct to focus on the need to remove opportunities for non-resident investors to transfer their imputation credits to eligible resident taxpayers, including situations where these credits can be accessed twice on the same fully franked dividends.
But the solution is not to be found by administrative changes and ATO auditing because the major opportunities to trade in imputation credits have arisen from two government decisions.
The first is the regulators' approval of the ASX special cum-dividend market, which allows investors not eligible to claim imputation credits to sell them to residents in the short period after shares are trading ex-dividend on the normal ASX. This market allows the risk-free sale of cum-dividend shares and repurchase of ex-dividend shares at the same time.
Unlike sales of shares cum-dividend before they are traded ex-dividend, the cum-dividend sellers can be certain of making a profit when they are repurchased ex-dividend at the same time. This is a bread and butter arbitrage situation for hedge funds and other market traders.
The second and much larger avenue for exploiting the imputation credit system is the longstanding benign attitude of both the regulators and ATO to the tax avoidance benefits of share lending. In particular, share lending has been widely used for many years for transferring Sec 46 and imputation credits between taxpayers. More recently with the introduction of capital gains tax, share lending has opened up opportunities to reduce capital gains tax liabilities.
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