When you purchase shares in the share market, the companies that you have shares in may declare a dividend. In most cases, the dividend amount comes with a franking credit, which is a rebate that shareholders get for the tax paid by the company. The amount of franking credit that you can claim is shown on the dividend statements that are issued to you.
You will then declare the amounts shown on the dividend statements on your tax return, where the franking credits will be taken into account when calculating your income tax liability.
But do you know that there are instances you may not be eligible to claim all the franking credits you have received?
The 45 day rule
The 45 day rule (sometimes called dividend stripping) requires shareholders to have held the shares ‘at risk’ for at least 45 days (plus the purchase day and sale day) in order to be eligible to claim franking credits in their tax returns. If you have held your share for less than 45 days then you cannot claim the franking credits in the dividends you have received. The rule is designed to prevent franking credits to be claimed by share traders who hold shares for a short period of time and then sell as soon as they qualify for a dividend. The rule applies to all individual taxpayers, entities and SMSF.
Example:
Claire purchased some shares of a listed company on 1 January. On 25 January the company has paid a fully franked dividend of $7,000 with $3,000 franking credits.
On 31 January, Claire sold all her shares in that company at a profit.
Because Claire has not held her shares ‘at risk’ for more than 45 days, she is not eligible to claim the franking credits that she has received. What’s worse, is that she has to declare the $7,000 dividend as income in her tax return, without the benefit of the $3,000 franking credits.
Exemption to the 45 day rule
The 45 day rule is not strictly applied to all share investors. The ATO has allowed small shareholders to be exempt from this harsh rule by introducing the small shareholder exemption.
The Small Shareholder Exemption allows shareholders who received total franking credits that is less than $5,000 for the financial year to claim their franking credits in their tax returns, even when they may not have held the shares at risk for 45 days.
Other complications
Preference shares
The 45 day rule extends to a 90 day limit for preference shareholders, meaning that they do not qualify to claim franking credits in their tax returns unless they have held their preference shares for more than 90 days (plus purchase day and sale day).
At Aston Accountants,we are experienced in helping share investors work out whether their dividends are caught under the 45 day rule, whether you are trading under your own name, under your company or a trust structure. Contact us to see how we can assist.
The 45 day rule (sometimes called dividend stripping
dividend stripping
Dividend stripping is the practice of buying shares a short period before a dividend is declared, called cum-dividend, and then selling them when they go ex-dividend, when the previous owner is entitled to the dividend.
https://en.wikipedia.org › wiki › Dividend_stripping
) requires shareholders to have held the shares 'at risk' for at least 45 days (plus the purchase day and sale day) in order to be eligible to claim franking credits in their tax returns.
The 45 Day Rule, also known as the Holding Period Rule, requires resident taxpayers to continuously hold shares "at risk" for at least 45 days (90 days for preference shares, not including the day of acquisition or disposal) in order to be entitled to the Franking Credits as a franking tax offset.
What is the 45 day rule? The 45 day rule is also called holding period rule that requires shareholders to hold shares for at least 45 days to claim the franking credits as a tax offset. If an SMSF has held the shares for less than 45 days then trustees can't claim these shares' franking credits in the SMSF tax return.
It applies to you if you make, are under an obligation to make, or are likely to make, a related payment. If the rule applies, and you do not hold the shares 'at risk' for a period of 45 days (90 days for preference shares), you are prevented from receiving a tax offset for the franking credits.
To claim the franking credits we need to hold the stock for 45 days excluding the dates of purchase and sale. To prevent investors receiving franking credits without being exposed to the performance of the share price (a practice known as “dividend stripping”) the requirement to hold the stock “at risk” was introduced.
If you hold a stock for one year or longer, your gain will be taxed at the long-term capital gains tax rate. But if you hold a stock for less than one year before selling it, your gain will typically be taxed at your ordinary income tax rate.
Short-term capital gains are gains on investments you've held for one year or less. These gains are taxed at a rate equal to the rate you're taxed on your ordinary income such as wages and taxable interest income. These rates range from 10% to 37% in 2023 and depend on your taxable income.
There is an exemption if you are an individual shareholder and the total franking credits you are claiming in the tax year is less than $5,000. That exemption may also apply to partnerships and some trusts but it may not too. 45 days means 47 days because the purchase and sale dates are excluded.
The auditor must be provided with evidence that the valuation of any property held by SMSF is valued accurately enough for them to sign off on their audit report. The general rule of thumb used by the majority of SMSF auditors is that property investments held by a SMSF must be valued at least every three years.
At the end of a financial year, if the level of in-house assets of a SMSF exceeds 5% of its total assets, trustees must prepare a written plan to reduce the market ratio to 5% or below. This plan must be prepared before the end of the next year of income.
If (after applying the LIFO method) the shares or interest in shares weren't held at risk for a continuous period of at least 45 days during the relevant qualification period, the taxpayer isn't a qualified person in relation to the franked dividend. They won't be entitled to the relevant franking credits.
It should be: Sell now, ask questions later. By limiting losses to 7% or even less, you can avoid getting caught up in big market declines. Some investors may feel they haven't lost money unless they sell their shares. They hold on with the hope it goes back up so they can break even.
Though there is no ideal time for holding stock, you should stay invested for at least 1-1.5 years. If you see the stock price of your share booming, you will have the question of how long do you have to hold stock? Remember, if it is zooming today, what will be its price after ten years?
Holding period is calculated starting on the day after the security's acquisition and continuing until the day of its disposal or sale, the holding period determines tax implications.
Dividends can be classified as qualified or nonqualified for tax purposes, with qualified dividends taxed at more preferential rates. To be considered a qualified dividend, the holding period for the stock must be at least 61 days within a 121-day period starting 60 days before the ex-dividend date.
A holding period return is the total return you received from holding an asset or collection of assets. You essentially subtract the price you initially paid from the price you sold the security, add any income paid, and then divide the sum by the initial value.
To determine how long you held the asset, you generally count from the day after the day you acquired the asset up to and including the day you disposed of the asset. If you have a net capital gain, a lower tax rate may apply to the gain than the tax rate that applies to your ordinary income.
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