The payment of special and ordinary dividends prior to completion of public company takeovers has been a common theme in many recent transactions.

Special dividends offer the following benefits:

  • they allow for extraction of additional value for shareholders;
  • they allow for a franked return to be provided to shareholders; and
  • they assist bidders (subject to the terms of the offer) in obtaining shareholder support for transactions without requiring additional dollar-for-dollar bidder funding.

A significant attraction for shareholders is the opportunity to access franking credits in the target which, in certain circumstances, may not be of significant benefit to an acquirer (eg private equity fund acquirers and non-residents in treaty countries which benefit from low or nil dividend withholding tax rates).

Tax ruling process

To provide comfort to shareholders, target company boards will often seek, on behalf of their shareholders, a class ruling from the Australian Taxation Office (ATO) which would cover off on a number of matters (subject to the precise terms of the transaction). In the context of the payment of a pre-sale interim and special dividend, the class ruling would generally cover off on whether:

  1. any part of the dividends constitute capital proceeds in respect of the disposal of shares in the target;
  2. the franking credits allocated to the dividends may be accessed by shareholders;
  3. the franking credit streaming anti-avoidance rules apply to the payment of the dividends; and
  4. the more general anti-avoidance rule relating to schemes regarding the obtaining of franking credit advantages (contained in section 177EA of the Income Tax Assessment Act 1936) is applicable.

This note covers the first two issues, as these will often be the more contentious issues from an ATO perspective and require careful consideration in formulating the structure of any transaction. Our focus is specifically on special dividends as these tend to be more heavily scrutinised by the ATO in practice.

Does the special dividend form part of capital proceeds?

The main relevance of this issue will be to shareholders who make a capital loss. This is because, while shareholders with an unrealised capital gain will exclude the dividend from their CGT calculation, shareholders with an unrealised capital loss will not. Therefore, they will have their capital loss reduced (by the amount of the dividend) and they will be taxed on the amount of the dividend (plus the franking gross up) under the dividend rules.

In Taxation Ruling TR 2010/4 (TR 2010/4), the ATO sets out its views on this question and concludes that a dividend will represent capital proceeds under a sale of shares if:

  • under a disposal of shares under a contract, any one or more of the following circumstances is present:
  • the vendor shareholder is entitled under the contract to refuse to complete the transfer if the dividend is not declared by the target company or if the dividend is not paid by the target company; or
  • the vendor shareholder is entitled to refuse to complete the transfer if a purchaser or third party does not finance or facilitate payment of the dividend; or
  • the vendor shareholder has bargained for any other obligation on the part of the purchaser to bring about the result that the dividend shall be received by the vendor shareholder; and  
  • in the context of a scheme of arrangement, if the vendor shareholders' acceptance of the scheme of arrangement (by requisite majority vote) is conditional upon one or more of the following circumstances being present:
  • the dividend being declared by the target company; or
  • the purchaser or a third party financing or facilitating payment of the dividend; or
  • the purchaser or a third party being obliged to bring about the result that the dividend will be received by the vendor shareholders.  

The takeover of Crane Group by Fletcher Building was an example of where the ATO concluded that the special dividend did not form part of the capital proceeds for the sale of shares in the target. While the relevant class ruling (CR 2011/59) is not specific as to the reasoning behind the conclusion, at paragraph 21 of CR 2011/59 it is noted that the interim and special dividends were not funded directly or indirectly Fletcher and were not conditional upon the acceptance by Crane shareholders of the Fletcher offer.

May the franking credits allocated to the special dividend be accessed by shareholders?

The key issue of importance for shareholders will be whether shareholders are entitled to franking credits on the special dividend which they receive. This requires consideration of whether shareholders are "qualified persons". For a shareholder to be a qualified person they must hold their shares "at risk" and uninterrupted for 45 days during a particular period (the Qualification Period). To be held at "risk", the shareholder must be exposed to at least 30% of the risks and opportunities on the shares.  The date of acquisition and disposal of the shares must be excluded from the calculation of the 45 day period.

In certain public transactions, the ATO considers that there is no "related payment", in which case the relevant qualification period will commence on the day after the share was acquired and ends (if the shares are not preference shares) on the 45th day after the day on which the shares become ex dividend (the Primary Qualification Period). In the context of the Crane transaction, the conclusion was that there was no "related payment" because, the special dividend was paid regardless of whether or not the Fletcher Building transaction proceeded.

In the context of many schemes of arrangement, the special dividend is often viewed as a "related payment" and, as such, this means that the Qualification Period commences 45 days before the "ex dividend date" and ends 45 days after that date (the Secondary Qualification Period). A special dividend will be taken to be a related payment where the special dividend is an integral part of a scheme of arrangement, for example where the payment of the special dividend is conditional upon the acquirer obtaining approval from the relevant majority of shareholders at the scheme meeting. However, where the special dividend would have been paid regardless of the outcome of the scheme meeting, it is less likely to be regarded as a related payment.

The ex dividend date is generally the day after the dividend record date because the dividend record date is the last day on which a shareholder could acquire a share and be entitled to receive a dividend. Furthermore, the ATO class rulings suggest that shareholders who participate in a scheme of arrangement will not hold their shares "at risk" as from the scheme record date (or, in the context of a takeover, as from the date on which all of the conditions precedent to the transaction have been satisfied).

Practically this means that the Secondary Qualification Period will run from 45 days before the "ex dividend date" up until the scheme record date.

Take an example where the ex dividend date is 26 June 2012 (meaning that the dividend record date is 25 June 2012) and the scheme record date is also 26 June 2012. The 45 day period prior to the ex dividend date would commence on 12 May 2012. In that situation, franking credits may not be able to be passed on (the scheme record date needs to be excluded from the calculation of the 45 day period). However, if the scheme record date was 27 June 2012, the 45 day qualification period should be satisfied.

The timeline below illustrates this timing principle, in the context of a special dividend which is taken to be related payment (hence, the Secondary Qualification Period applies).

Click here to view diagram.


While special dividends are frequently integral to delivering value to target shareholders in a public M&A deal, they need to be structured carefully. Furthermore, the process for obtaining an ATO class ruling (which can take 3-4 months) needs to be built into the transaction timeline.