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How does "dividend washing" used illegally by some DIY super funds work?

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tinhat

tinhat

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I don't understand how "dividend washing" works. It is illegal but has been used apparently by SMSF.
Dividend washing occurs when shareholders seek to claim two sets of franking credits, effectively on a single parcel of shares.
For example, an investor holding franking credits in a stock who has held it for 45 days, sells the stock ex-dividend, pocketing the dividend and franking credits. They then go straight back in to the market to buy an equivalent quantity of the stock “cum dividend”, thus picking up two sets of dividends and franking credits.

Read more: http://www.smh.com.au/business/pers...unds-for-dividend-washing-20140717-zu2fl.html
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How can one sell shares that have gone ex-dividend and "then go straight back in to the market" to buy those shares back on a cum-dividend basis "picking up two sets of dividends and franking credits". I don't get it! I'm just not smart enough to be a successful white collar criminal.
 
tinhat said:
I don't understand how "dividend washing" works. It is illegal but has been used apparently by SMSF.


How can one sell shares that have gone ex-dividend and "then go straight back in to the market" to buy those shares back on a cum-dividend basis "picking up two sets of dividends and franking credits". I don't get it! I'm just not smart enough to be a successful white collar criminal.
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Had exactly the same feeling
then I looked at
http://www.deloitte.com/assets/Dcom-Australia/Local%20Assets/Documents/Services/Deloitte%20Private/Tax%20Telegraph/Deloitte_Tax_Telegraph_August_2013.pdf
and was surprised that shares can trade for two days cum-dividend after the shares go ex-dividend.
Yeap!!!
IMHO, this is the problem not the fact some wise people use this;
in effect you get your normal dividend once then 2 franking credit (the second dividend $ value is lost by the margin you have to add when repurchasing as i understand it) but you still double your franking credit...
 
so you just need to find two codes with this weird multiple day dividend allowance
sell the first one you bought a while back (45d +), buy the second that day and while just reallocating (ie out of CBA to ANZ to reduce RE exposure risk for example) and Bob is your uncle;
It would be hard for the ATO to justify that this is tax avoidance!!!unless you do this every year
Anyway, I do/did not engage in either
 
qldfrog said:
so you just need to find two codes with this weird multiple day dividend allowance
sell the first one you bought a while back (45d +), buy the second that day and while just reallocating (ie out of CBA to ANZ to reduce RE exposure risk for example) and Bob is your uncle;
It would be hard for the ATO to justify that this is tax avoidance!!!unless you do this every year
Anyway, I do/did not engage in either
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Wouldn't you fail the "45 clear days" rule on the second parcel bought "cum-div" if you don't hold them for the required time and thus not get the second lot of franking credits?

If you hold them for the required time (45 clear days) after purchasing them "cum-div" wouldn't this still be legal?
 
Thanks for the replies. So, from reading further, this is a loophole only available to sophisticated investors who have access to a special market operated by the ASX which allows trading, generally for 48 hours after the stock went ex-dividend, on a cum-dividend basis with the share price grossed up to reflect the dividend amount, under a different stock code only available to the sophisticated investors. This also suits foreign share owners who cannot claim franking credits, who can sell ex-dividend shares at a cum-dividend price on this special market.

Using the example in the morning star article (link below) which assumes no brokerage:

Purchase 10,000 shares in ZCF at $5, 45 days before ex-dividend date for $75,000 expecting a dividend of $0.14 per share.

Sell this parcel on ex-dividend date for $50,000 plus now have entitlement to receive dividend cheque of $1,400 plus entitlement to claim franking credits of $600. Total value accrued is $52,000.

I'm just thinking out aloud here to work it out in my head...

Buy parcel on special market for sophisticated investors on cum-dividend basis, 10,000 shares at $51,400. These shares carry a dividend entitlement of $1,400 plus a franking credit of $600. Total value accrued (pricing shares at ex-dividend value on the normal market) is $50,000 (same as initial outlay) plus $1,400 dividend entitlement plus two lots of franking credits ($1200) which equals $52,600. So, at the end of the day, the dividend washing exercise enables the purchaser to claim two lots of franking credits and they come out $600 ahead in this example.

http://www.morningstar.com.au/smsf/article/dividend-washing/6316
http://theconversation.com/a-frank-debate-dividend-washing-and-double-dipping-15136
 
rohan1234r said:
Can you demonstrate another reason for the trade's at the precise times?
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well I do 1000's of trade a year so just sheer probability would allow that to happen.

Anyway, want to restate: not doing it, never done it and loophole should be closed, but why would we have once again special treatment for specific investors;
the ASX is really one rule for some, another for the common people (or should I say suckers)?
 
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