Industry Updates

State Street begs ATO for relief after STW franking credit miss

David Tuckwell

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State Street has put in a formal request with the Australian Taxation Office to change the tax election of its legendary ASX 200 tracker STW.

The request comes after STW failed to pay an end of financial year franking credit this July, for the first time in 18 years of operation.

The failure to provide a franking credit sparked investor fury and caused State Street’s phones on George St, Sydney to fry. It also triggered a massive investor exodus from STW, catalysing an asset bleed of almost $200 million in four weeks.

Defensive factors in favour at State Street

“We have submitted a request with the [ATO] for the revocation of the benchmark ceiling election,” Peter Hocking, SSGA’s company secretary, wrote in an ASX update.

“There is no certainty the request will be granted… and there is also no certainty on the timing of any decision by the ATO.”

The failure of STW to pay a franking credit stems from an obscure piece of tax law called the “benchmark rule”. (What Mr Hocking refers to as the “benchmark ceiling election”.)

The benchmark rule - which, until very recently, was known only to tax lawyers and finance pointy heads - involves taking a government-assigned benchmark for how many franking credits you’re allowed to receive.

Whereas most Aussie funds use an alternative rule, called the “45 day rule”, State Street chose the benchmark rule way back in 2002 because they thought it would be easier to manage large investor redemptions.

While the benchmark rule has worked fine and dandy for STW for nearly two decades, it hit a snag this year. How and why the rule caused STW’s franking flop remains a mystery. When the issue was first raised in mid-July, State Street said they did not know what went wrong.

The ATO request also represents a very sudden change of tune. As recently as yesterday, State Street was telling media outlets that the benchmark rule "has served the fund well".

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