Trustee of the WT & A Norman Superannuation Fund & the Trustee of Mary A Norman Superannuation Fund and Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Administrative Appeals Tribunal (2014/6023 & 2014/6090)
Judgment date: 27 November 2015
Date published: 17 March 2016

Summary of decision:
The Tribunal has affirmed the Commissioner's decision that section 177EA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to cancel imputation benefits associated with the Applicants' 'dividend washing' transactions.

Overview of facts:
The Applicants were the trustees of the WT & A Norman Superannuation Fund and the Mary A Norman Superannuation Fund. | In 2012 and 2013, the Applicants, on the advice of their brokers, engaged in a series of paired transactions involving a sale and matched purchase of ASX-listed shares in a practice which has come to be known as 'dividend washing'. | Broadly, each dividend washing transaction involved: • Selling a parcel of ASX-listed shares on the ordinary market immediately after the shares began trading 'ex-dividend'; and • Immediately after the sale, purchasing an identical number of ordinary shares 'cum-dividend' at a higher price on an ASX Special Market - a market which operated for a short period after the 'ex-dividend' date and enabled trading on a 'cum-dividend' basis. | • Selling a parcel of ASX-listed shares on the ordinary market immediately after the shares began trading 'ex-dividend'; and • Immediately after the sale, purchasing an identical number of ordinary shares 'cum-dividend' at a higher price on an ASX Special Market - a market which operated for a short period after the 'ex-dividend' date and enabled trading on a 'cum-dividend' basis. | The Applicants claimed franking credits in respect of the dividend on each parcel of shares. The pair of transactions, generally speaking, produced a net negative economic outcome disregarding the value of the second franking credit, but was economically advantageous when the value of both credits was taken into account. | In deciding the relevant objection, the Commissioner made a determination under paragraph 177EA(5)(b) of the ITAA 1936 that no imputation benefit was available to the Applicants in respect of the distributions received on each parcel of shares purchased on the ASX Special Market. | Issues Decided by the Tribunal | The primary issue before the Tribunal was whether section 177EA of the ITAA 1936 applies to dividend washing transactions entered before section 207-157 of the Income Tax Assessment Act 1997 (ITAA 1997) was enacted and operative. | Application of s 177EA of the ITAA 1936 | SM O'Loughlin considered that the requisite purpose must be determined objectively by reference to the prescribed factors. A finding that the requisite purpose is present does not necessarily mean that the subjective intention of those involved was to obtain an imputation benefit; nor does it necessarily mean that the evidence given with regard to subjective intention is not honest. | The Tribunal found that the Commissioner's articulated scheme was a 'scheme for a disposition' of membership interests and that all conditions for the application of section 177EA of the ITAA 1936 were satisfied subject to the determination of purpose. | In finding that the Applicants had a non-incidental purpose of obtaining an imputation benefit, SM O'Loughlin identified the following three 'striking' features which led him to conclude that the requisite objective purpose could be identified on a holistic analysis: • at any time, the Applicants only had ownership of, and exposure to, one shareholding; • ignoring the imputation benefits, the Applicants cash flow and change of wealth on each integrated transaction was negative. Having regard to those benefits, the cash flow was positive; • the integrated transactions were carried out on the same day in different markets such that different dividend entitlements would be enjoyed. | • at any time, the Applicants only had ownership of, and exposure to, one shareholding; • ignoring the imputation benefits, the Applicants cash flow and change of wealth on each integrated transaction was negative. Having regard to those benefits, the cash flow was positive; • the integrated transactions were carried out on the same day in different markets such that different dividend entitlements would be enjoyed. | The Tribunal also analysed the factors individually, reaching the same conclusion.

Issues decided:
The primary issue before the Tribunal was whether section 177EA of the ITAA 1936 applies to dividend washing transactions entered before section 207-157 of the Income Tax Assessment Act 1997 (ITAA 1997) was enacted and operative. | Application of s 177EA of the ITAA 1936: SM O'Loughlin considered that the requisite purpose must be determined objectively by reference to the prescribed factors. A finding that the requisite purpose is present does not necessarily mean that the subjective intention of those involved was to obtain an imputation benefit; nor does it necessarily mean that the evidence given with regard to subjective intention is not honest. The Tribunal found that the Commissioner's articulated scheme was a 'scheme for a disposition' of membership interests and that all conditions for the application of section 177EA of the ITAA 1936 were satisfied subject to the determination of purpose. In finding that the Applicants had a non-incidental purpose of obtaining an imputation benefit, SM O'Loughlin identified the following three 'striking' features which led him to conclude that the requisite objective purpose could be identified on a holistic analysis: • at any time, the Applicants only had ownership of, and exposure to, one shareholding; • ignoring the imputation benefits, the Applicants cash flow and change of wealth on each integrated transaction was negative. Having regard to those benefits, the cash flow was positive; • the integrated transactions were carried out on the same day in different markets such that different dividend entitlements would be enjoyed. • at any time, the Applicants only had ownership of, and exposure to, one shareholding; • ignoring the imputation benefits, the Applicants cash flow and change of wealth on each integrated transaction was negative. Having regard to those benefits, the cash flow was positive; • the integrated transactions were carried out on the same day in different markets such that different dividend entitlements would be enjoyed. The Tribunal also analysed the factors individually, reaching the same conclusion.

ATO view of decision:
The ATO considers that the Tribunal's reasoning is consistent with the Commissioner's view on the application of the law to 'dividend washing' transactions as articulated in TD 2014/10 - Income tax: can section 177EA of the Income Tax Assessment Act 1936 apply to a 'dividend washing' scheme of the type described in this Taxation Determination? | The commencement of section 207-157 of the ITAA 1997 (enacted on 30 June 2014 with effect from 1 July 2013) is expected to remove the need for the Commissioner to make determinations under section 177EA of the ITAA 1936 to deny imputation benefits arising under dividend washing transactions where the relevant distributions are made on or after 1 July 2013.

Administrative treatment:
Implications for impacted ATO precedential documents (Public Rulings and Determinations) | Nil | Implications for impacted Law Administration Practice Statements | Nil

Legislative references: Income Tax Assessment Act 1936 (Cth) section 169A section 177D section 177EA Income Tax Assessment Act 1997 (Cth) section 207-157
Case references: Mills v Commissioner of Taxation of the Commonwealth of Australia (2012) 250 CLR 171 83 ATR 514 2012 ATC 20-360