The ATO website states:
The purpose of the franking credit trading rules is to prevent the inappropriate use of franking credits by taxpayers who are not the true economic owners of the shares.
and provides the holding period and related payments rules to clarify its position.
However, I cannot determine whether the ITAA overrides the small shareholder exemption or if it is the other way around:
The first criteria for cancellation involves determining if there is a scheme, which you would think is automatically satisfied, as a scheme to acquire and dispose of interests (and their attached franking credits) in Australian equities to allow different taxpayers to obtain an imputation benefit is implicit in the securities of publicly traded equities. Although, in the recent Mills case, it would suggest that the dominant purpose of an equity raising is to raise capital and that the imputation/franking credits from profits of public companies are just incidental. The incidental "phrase" effectively nullifies Part IVA as stated in the ITAA itself.
However, is dividend stripping another scheme? The scheme itself doesn't allow the exchange of shares or interests, i.e. dividend stripping itself doesn't facilitate the transfer of shares. Although, it might be thought of as an unilateral scheme, even if you wouldn't know who is participating due to the execution of trades over an exchange. Compare this to deliberate matching of foreign investors to Australian investors that can access imputation credits, in which case the ATO would definitely cancel your credits.
So, that's the scheme part...
If it fails at this point, then whatever is written below may not be applicable. Although, I've been reading that the scheme criteria is almost automatically satisfied because it's so broad.
Relevant Circumstances:
I won't cover all of it, but this is where it conflicts a bit with the exemption. Thus, I am not sure which part takes precedent. (The following are not in order)
I don't know how they would argue that any shareholder would be in a better position than another unless you know in advance that the seller is a foreign-holder and how exactly are traders meant to know whose order's they are being filled against on the exchange.
Furthermore, the risk and duration of a stock being held is already negated with the small shareholder exemption that doesn't require the 45-day holding period rule. Or is it?
The rest of the criteria appears to be indifferent when analysing publicly traded equities. The dominant purpose may be challenged as the exchange is setup to trade interests in the shares rather than the dividends which are incidentally part of the shares, but depends on how the scheme is interpreted and what the scheme actually is.
This website gives a good summary for those who don't like looking at the actual legislation:
http://www.partiva.net/franking-credit-benefit
There is also some information about tax benefits and capital losses which could be cancelled...
It does appear to be interesting. I'm still wondering whether if there will be changes in the future seeing that there has been a push for budget surplus. If so, it will be interesting to see how exactly the rules would change.
Returning to the main point, I believe that the you can only be confident with the gain associated with the pre-dividend rally, if there is a gain to be captured. I suppose this was the original purpose of the thread as titled.
Significant risks include having to repay imputation credits and a nasty 10%+ ATO interest rate. Wasted brokerage and opportunity cost from the time spent seeking opportunities which were anticipated to exist but in actuality were not real.
I bet I would get a different answer each time I sought advice depending on their confidence in defending the position. x_X
Why am I interested?
As part of a free brokerage deal with westpac, I picked up some CBA shares at 66.80 on 15th February to capture an intra-day dip which closed at 67.03. On the 18th February CBA opens with 1.74 lower at 65.29 with a dividend of 1.64, but since I'm ahead I hold on and the rest is history. Exited the position later that day at 65.75, although it subsequently rose even higher.
I am now weighing up whether I can actually claim that franking credit or not... Or whether I can only access the capital gain.
I tried to do the same with Wesfarmers but was less successful, but now I have two different sets of franking credits that I am probably not able to access.
Note: I wouldn't have made a trade without free brokerage, but I'm not sure that matters.