SMSF – Dividend stripping

The ATO has raised concerns with arrangements where a taxpayer is a shareholder of a private company and a trustee member of

an SMSF.  In the arrangement:

  • the company transfers shares to the member’s SMSF
  • the company then pays a franked dividend
  • the SMSF trustee treats the franked dividend is treated as exempt income.

The ATO considers such an arrangement may be akin to dividend stripping.

Why enter into these arrangements?

The taxation treatment of franked dividends varies between individuals, who, depending on their marginal personal income rate, may have to pay additional tax on a franked dividend and SMSFs.

The effective tax rate of a complying SMSF receiving fully franked dividends may be either 15% if the SMSF is in the accumulation phase, or 0%, if the SMSF is in the pension phase, in which case the dividend will be exempt income.

Under both scenarios, the franking credits attached to dividends will either reduce the SMSF’s tax bill in respect of other liabilities or provide a refund.

Who might this apply to?

The ATO has identified arrangements that typically give rise to concern generally involve taxpayers who are close to preservation age, the value of the company is substantially reduced by payment of the dividend and company is often wound up after payment of the dividend. The ATO has noted this alert also applies where the arrangement feature trusts.

What you should do if this applies to you

You should seek independent legal advice if you have entered into similar arrangements.

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