The dividend imputation system eliminates double taxation when dividends are distributed to shareholders. The company pays a corporate tax on its profits. Later, a proportion of that tax is passed to the shareholders as a franking credit when the dividends are distributed. As a taxpayer you must include in your assessable income the dividends received as well as franking credits. When the tax payable is calculated on the grossed-up amount a resident taxpayer is generally entitled to a tax offset equal to the amount of franking credit included in his or her income.

You are not eligible for the tax offset or a refund of excess franking credits if the anti-avoidance rules are triggered. The anti-avoidance rules include the:

    holding period rule;

    related payments rule.

Recently, the ATO announced that it continues targeting taxpayers who are involved in “dividend washing” schemes. This scheme refers to transactions that involve obtaining two sets of franking credits from one dividend.

From mid-August 2014 the ATO has been issuing letters to 500 taxpayers who did not respond to their initial letters, and up to 1,500 other taxpayers who the ATO’s updated data analysis suggests may have entered into a dividend washing transaction.

If you have received a letter from the ATO and not acted, you must do so as soon as possible to avoid penalties. Our tax accountants can help in this regard. Call 02 9223 9166 to arrange an appointment or submit an online enquiry here.