The ATO is preparing to enter into the second phase of its dividend washing compliance program.

Over 3000 individuals and entities have now received written correspondence requesting that they amend their returns to rectify dividend washing benefits.

BLOG: ATO cracking down on dividend washing

Taxpayers who have gained a tax benefit from dividend washing transactions are being asked to self amend their tax-returns for the 2011, 2012, 2013 and 2014 financial years. There will be no penalties for taxpayers who comply with this direction.

Dividend washing occurs when a shareholder sells and then immediately repurchases an identical bundle of shares, and in the process claims two sets of franking credits when in substance they have only held one set of shares.

When the shares are first sold the holder retains the franking credit. This is known as selling shares ex-dividend. The investor then repurchases an identical set of shares cumdividend (with the franking credits), thereby receiving two sets of franking credits.

Dividend washing transactions occur on the ASX trading market, where shares can be sold without dividends. Taxpayers who have engaged in dividend washing are unable to claim the tax offset gained from the second set of shares. The ATO will continue to monitor dividend transactions and apply the divided integrity rule to prevent future divided washing.