DESCRIPTION
A company declares a franked dividend. 2. The taxpayer borrows a parcel of shares in the company cum dividend from a lender before the shares become ex dividend. 3. The taxpayer also purchases an option from the lender over the same number of shares in the same company. The option may be closed out or sold. The option is cash-settled (i.e. no right to call for the physical delivery of the shares). 4. The taxpayer cannot sell, assign, or deal with the shares in any way without the express written consent of the lender. 5. The taxpayer is not entitled to exercise any voting power in relation to the shares or to retain any bonus shares or capital repayments. 6. The taxpayer pays the lender a transaction fee which approximates the value of the cash dividend on the shares borrowed. 7. A franked dividend is paid on the shares and the taxpayer is entitled to the dividend and the franking credits. 8. The parcel of shares is returned to the lender after the dividend has been paid. 9. The taxpayer may be obliged to apply the dividend in satisfaction of the transaction fee by way of set-off or otherwise. 10. The taxpayer returns the grossed-up dividend as income, claims a tax offset for the franking credits and claims a deduction for the transaction fee.