Super funds take ATO to court over franking credit denials

Industry fund HESTA has filed an appeal against an ATO decision on tax offsets from franking credits, with the Australian Retirement Trust set to file a similar claim soon.

HESTA Super has filed a notice of appeal in the Federal Court against an objection decision made by the Australian Taxation Office (ATO) after the Tax Office denied claims for tax offsets by HESTA amounting to approximately $11 million.

Super Review understands that the ATO denied tax offsets relating to franking credits, as HESTA did not meet the qualified person definition required to claim imputation credits.

This was on the basis that HESTA did not hold the shares on which distributions were paid for the required 45-day period due to its hedging positions, according to reports by Lawyerly.

In order to be eligible for a refund of franking credits, taxpayers must meet the qualified person test by meeting both the holding and related payments rules.

HESTA has denied that it was not a qualified person, and that it held the shares during the applicable qualification period.

The super fund said its appeal against the tax assessment would help “clarify an area of law which is broadly an industry-wide issue”.

The Australian Retirement Trust also confirmed it will file a claim against an ATO decision on a similar issue that relates to a three-year-old audit of QSuper. QSuper merged with Sunsuper in 2022 to form the Australian Retirement Trust.

In a statement issued to Super Review sister brand InvestorDaily, the super fund said the tax issues involved in the matter were complex, and that QSuper was actively co-operating with the ATO.

It also noted that provisions for costs and penalties were made by QSuper prior to the merger.

If the Federal Court decides to uphold the ATO’s position, the amount owed to the Tax Office by the super fund would likely be in the low tens of millions.

The ATO previously alerted investors and superannuation funds back in 2020 about certain arrangements involving imputation benefits it considered to be high-risk in taxpayer alert TA 2020/5.

The Tax Office warned that it would review arrangements that are intended to provide imputation benefits to Australian taxpayers in respect of a parcel of shares where, as a result of derivative instruments entered into as part of the arrangement, the taxpayer retains no or nominal economic exposure to the dividend and capital performance associated with that parcel of shares.

The ATO said these arrangements typically involve a taxpayer who already holds an existing long position in a portfolio of Australian shares acquiring additional parcels of Australian shares or interests in shares and at almost the same time entering into derivative instruments – that are a short position – in relation to those additional shares.

“While the derivative instruments themselves may differ, typically these arrangements result in the taxpayer having no or nominal economic exposure to both the dividend and capital performance associated with those additional shares,” the ATO said.