Tax with Max: The ATO and dividend washing

The ATO’s crackdown on dividend washing, the government deposit guarantee, and more.

Summary: Individuals who have engaged in so-called dividend washing, on the advice of an accountant or other advisor, should seek professional advice on the potential impact of the Tax Office’s recent determination banning this practice.

Key take-out: The ATO change applies to transactions that occurred before July 1, 2013. The ATO ruling only will apply to investors who have franking credit tax offset entitlements in excess of $5000 across their portfolio.

Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

Handling the dividend washing wash-up

I received a letter from the Tax Office noting that we had made some share transactions in our SMSF that collected double franking credits. This scheme was introduced to us by our broker/advisor and were assured that it was all quite legal and above board. The Tax Office has invited us to lodge an amended tax return. Presently the letter is with our accountant for advice and to make any amendments to returns.

The scheme involved selling some or all of a particular stock on the ex-dividend date, mainly to get the funds. Then on the same day we repurchased the same stock. The price for the shares re-purchased was at a cost that was the sell price plus the dividend and part of the franking credit. The net gain was a large part of the franking credit. The new cost base of the shares was then higher. The dividends paid were for two lots of dividends and two lots of franking credits. Do you have any knowledge of this situation?

Answer: I know that the ATO recently issued a determination statement that covers their attitude in relation to this strategy. The term for the strategy recommended to you is called “dividend washing”. (See the article Dividend washing dries up). The federal government is also aware of this strategy, and is concerned enough about it to have announced that it will be inserting a new integrity rule into the tax law banning this practice. The new rule will apply to transactions occurring from July 1, 2013.

When it comes to matters of taxation law the ATO often issue determinations that spell out what their interpretation of the income tax law is, but this does not mean that in all cases the ATO's interpretation is correct. Sometimes if the ATO’s interpretation is wrong the government of the day changes tax laws so from that point in time the ATO’s interpretation will have the support of the law.

As the amending legislation will not apply to transactions that occurred before July 1, 2013, and if the transactions that your SMSF entered were before this date, they may have been all quite legal and above board, as your broker advisor suggested.

Your accountant should be able to advise you as to whether you should be lodging an amended return. If he or she cannot offer this advice you should seek it from someone who specialises in this area of taxation law.

If it turns out that the ATO's interpretation is correct, and you end up suffering a loss as a result of what was recommended to you, you should seek legal advice as to whether you have any redress against your sharebroker advisor.

Understanding the government deposit guarantee

I understand that the government deposit guarantee on bank accounts covers amounts up to $250,000. If you have a bank account containing $251,000, is the first $250,000 covered or is the whole amount a risk?

Answer: Under the government bank guarantee deposits of up to $250,000 with a bank are guaranteed. This means, in the circumstances you have outlined, and the bank failed, only $1000 of the deposit would be at risk.

Can members undertake maintenance on SMSF property assets?

Our SMSF has two residential rental properties as part of its investment portfolio. Both were acquired from the fund’s cash holdings with no gearing. Both properties require some repairs and maintenance, but not major renovations. One of the members of the fund, who is a director of the corporate trustee, has a building maintenance company.

Under the super rules is it possible for this company to provide repair and maintenance services on the fund’s properties. All dealings would be at commercial arms length with documented quotes at market rates, properly submitted invoices, sign-off of the work undertaken prior to payment etc. If allowed, would the fund auditor need to review the documentation?

Answer: The only time that trustees and associated parties of a self-managed super fund can be paid for work done is when they are suitably qualified to carry out that work. From what you have described, the member and their building maintenance company would meet the criteria with regard to carrying out the work.

Also, the documentation that will be prepared should support the legitimacy of the building maintenance company carrying out the work on the properties. Whether this documentation will be reviewed by your fund’s auditor will depend on whether they request it.

In most cases auditors do not check every payment or receipt for an SMSF during the year being audited. Instead, auditors tend to select a sample number of transactions to test and, depending on whether any contraventions have been found; no other documentation may be requested. In addition to having the documentation that you will be preparing you should also consider having documentation that proves the member and the building maintenance company are suitably qualified, should the auditor require this also.

Understanding binding death benefit nominations

We have a corporate trustee for our SMSF and my husband and I are in the process of making binding death benefit agreements, which are permitted by guidelines and the trust deed, whereby 100% of our pension member accounts are to be directed to one another. Are we able to incorporate into the agreement a clause that will apply if both of us die at the same time, such as in a car accident, which directs the trustee to pay the benefits to our estate?

In terms of the trustees, our daughter is to assume the role of a non-contributing member/trustee and thus is the third trustee. Our trust deed refers only to a death benefit agreement where the term death benefit nomination seems to be more widely used. Is there a difference?

Answer: I do not understand why your daughter will assume the role of the non-contributing member trustee when you both die. As you have a corporate trustee, whoever is your personal legal representative after you die, normally the executor of your will, would take over as director of the corporate trustee. If your daughter is to be the executor of your wills you should consider appointing her as a director of the trustee company now.

You should be able to include in your binding death benefit agreement, which is also known as a binding death benefit nomination, a clause that requires in the event of a spouse predeceasing the member that their superannuation account is paid to their estate. This type of document is sometimes called a cascading binding death benefit nomination.

This is a complex area of estate and superannuation law and you should seek professional advice from someone that specialises in these two areas.

NZ tax on SMSF pension payments

What might happen if someone moves to New Zealand with an Australian SMSF in pension mode? Is there a tax agreement in place or do the New Zealand tax rules apply where everything is taxed and everyone gets the pension?

Answer: There would be a double tax agreement between Australia and New Zealand but I'm not 100% sure of how this would affect you if you move to New Zealand. As long as you are over 60 the pension you would be receiving from your SMSF would be tax-free in Australia. As to what tax you would pay on this in New Zealand you would need to seek advice from someone who specialises in New Zealand taxation law.

Another problem that you must consider relates to the fact that if you are moving to New Zealand permanently you would not satisfy the residency test and therefore your SMSF could be made non-complying. You may need to consider converting all of the investments in your SMSF to cash and rolling over into an industry or a commercial super fund.

When looking for a professional to get advice from in relation to New Zealand taxation law you should try and find someone that also can advise you on what must happen with your super fund if you do move there.


Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs. Also go to www.smsfsurvivalcentre.com.au.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Max? Send an email to askmax@eurekareport.com.au