ATO Issues Taxpayer Alert

The ATO has issued a Taxpayer Alert concerning arrangements (which the ATO describes as “dividend stripping” – which is a practice where dividends are distributed in circumstances where no tax is incurred on the payment of the dividends) where SMSFs acquire private company shares and substantial dividends are then declared on those shares.  Typically, the private company has a significant amount of franking credits: that is, the company has a significant amount of previously taxed but accumulated profits.  Also, typically, the SMSF goes into pension phase before the dividends are paid thereby having the effect that the dividends are received tax free and the franking credits are paid as a cash refund to the SMSF (as the dividends are paid after the SMSF has held the shares for at least 45 days).

The ATO considers that such arrangements may give rise to a dividend stripping issue, Part IVA issues (the general anti-avoidance provision of the Tax Act) and SIS compliance issues.

The ATO has suggested that SMSFs involved in such arrangements seek their own advice as to whether their particular arrangements could be challenged by the ATO.  It seems that the ATO will seek to apply the maximum possble penalties.  SMSFs may seek advice as to whether a voluntary disclosure should be made and seek to amend their tax return/activity statement in order to minimise tax penalties (because of the voluntary disclosure).