BONUS – Franking Credits Scheme

ATO warns on franked distributions funded by raising capital to release franking credits

The ATO is concerned about arrangements being exploited by some companies for the purpose of releasing franking credits or streaming dividends to shareholders.

It says this may attract the operation of the anti-avoidance rule in section 177EA of the Income Tax Assessment Act 1936 or other anti-avoidance rules. One immediate purported effect of these arrangements is the release of franking credits that may otherwise have been retained by the company.

If anti-avoidance rules apply to an arrangement, the ATO says there may be adverse implications at the shareholder level and the corporate level.

It has therefore issued a taxpayer alert warning that it is reviewing arrangements that display all or most of the following features:

  • a company with a significant franking credit balance raises new capital from existing or new shareholders. This may occur through issuing renounceable rights to shareholders (which may include large institutional superannuation funds)
  • at a similar time to the capital raising, the company makes franked distributions to its shareholders, in a similar amount to the amount of capital raised. This may occur as a special dividend or through an off-market buy-back of shares, where the dividend forms part of the purchase price of the shares.

The ATO says that overall there will generally be:

  • minimal net cash inflow to, or outflow from, the company
  • the net asset position of the company remains essentially unchanged (in a buy-back variant, the number of shares on issue following the transaction may be marginally reduced due to the difference between the buy-back price and the issue price of the new shares) but their franking account is significantly reduced, and
  • there is minimal impact on shareholders, except in some cases they may receive refunds of franking credits, and in the case of buy-backs they may also get improved capital gains tax outcomes.

The ATO warns that typically the resulting franked distributions (or franked component of a buy-back consideration) may be unusually large compared to ordinary dividends previously declared and paid by the company (as distinct from a typical dividend reinvestment plan applicable to an ordinary regular dividend).


The franked distribution may be receivable by all existing shareholders of the company, or shareholders may have a choice as to whether to participate (for example, in a buy-back scenario).

The ATO is currently reviewing these arrangements and says it will develop a technical position on the arrangements. In the meantime, it says if you or your clients have entered into, or are contemplating entering into, an arrangement of this type, it encourages participants to discuss the situation by emailing

Penalties may apply to participants and promoters of this type of arrangement.