The Australian Tax Office today released a taxpayer alert warning people to be cautious about sophisticated structured financial products that claim to offer franking credits and other tax benefits.
“These complex highly-structured investment products claim to offer investors exposure to a portfolio of listed securities but use a derivative instrument, such as a swap to direct the cash dividend to a counterparty, while attempting to retain the benefit of franking credits on the dividends,” Tax Commissioner Michael D’Ascenzo said.
“Franking credits attach to distributions paid by a company, representing tax paid by the company on its profits. However, franking credits are only available under the law to the true economic owners of the shares in the company, not those who dispose of the risks and benefits of owning the shares.”
The income tax legislation contains specific measures to counter practices that undermine the imputation system, including integrity rules and a general anti-avoidance provision to stop abuse of the system. The ATO is concerned that these arrangements may not comply with these rules.
Tax Commissioner Michael D’Ascenzo said the effect of the arrangement is to transfer the franking credit benefits from an entity that cannot fully use them to an entity (investor) who can, while not assessing that investor on the income from the dividends because of the derivative.
“The arrangements are currently being dealt with by a new ATO taskforce on retail and wholesale financial products that promise tax or superannuation benefits that may not be available under the law. The Taskforce is currently contacting the entities that are marketing and facilitating these arrangements about our concerns, including that they may risk contravening the promoter penalty laws”, Mr D’Ascenzo said.
“We are seeing positive statements about the availability of franking credits and other tax benefits in marketing documents for these products, although sometimes with the caveat that investors should obtain their own tax or legal advice to confirm entitlement. We encourage investors contemplating entering into complex financial products with significant tax consequences to seek advice from an independent adviser or seek a ruling from the ATO.”
“We have also alerted the Australian Securities and Investment Commission about the marketing of these schemes.”