Dividend strippingis the acquisition of shares just before a dividend is paid, and the sale of those shares straightaway after the dividend payment. The purpose of dividend stripping is to simultaneously acquire a share’s dividend, imputation credit and capital gain. Dividend stripping is seen as a tax avoidance scheme. The Tax Office has introduced the 45-Day Rule to stop investors manipulating the tax system by utilizing the dividend stripping strategy.
The 45-Day Rule requires resident taxpayers to hold sharesat riskfor at least 45 days (90 days for preference shares, not including the day of acquisition or disposal) in order to be entitled to Franking Credits.
The 45-Day Rule is one of theanti-avoidance rulesaimed at preventing the unintended use ofFranking Credits. It generally applies to shares bought on or after 1 July 1997. This holding period rule does not apply where an individual’s total Franking Credits entitlement for the Financial Year are below $5,000. The 45-Day Rule applies to all SMSF’s regardless of the amount of Franking Credits. This means that the $5,000 exemption that applies to individuals does not apply to SMSF’s. The holding period rule only needs to be satisfied once for each purchase of shares.
Your SMSF’s entitlement to Franking Credits may also be affected by theRelated Payments Ruleand theDividend Washing Integrity Rule.
We useSimple Fundto prepare theAnnual Returnfor all our SMSF clients. InSimple Fundthe way to record shares which have not met the 45-Day Rule is to record the dividend as fully unfranked. Hence, your SMSF will not obtain the benefit of the Franking Credits for the Financial Year in which the shares in your Fund were not held for at least 45 days. However, if your SMSF holds the shares for more than 45 days in the next Financial Year, your SMSF will then be entitled to the benefits of Franking Credits.
The ATO gives examples of how the 45-Day Rule works, please see the ATO examples on page1 and 2here. To learn more about Franking Credits and investments in the SMSFs, please visit ourFranking Creditsandinvestmentspage.
FAQs
The 45-Day Rule requires resident taxpayers to 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 Franking Credits.
What is the 45 day rule exemption? ›
Exemption to the 45 day rule
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.
What is the 45 day holding rule for the franking credit? ›
Holding period rule
To be eligible for a tax offset for the franking credit you are required to hold the shares 'at risk' for at least 45 days (90 days for preference shares and not counting the day of acquisition or disposal). The holding period rule only needs to be satisfied once for each purchase of shares.
What is the 45 day rule last in first out? ›
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.
What is the rule for dividend stripping? ›
The provisions in the Income Tax Act regarding dividend stripping are designed to curb the practice of using short-term transactions around dividend dates to manipulate tax liabilities. The law aims to ensure that losses from such transactions cannot be used to offset gains for tax purposes.
What is the rule 3 of dividend rules? ›
Rule 3 of Dividend Rules prescribes the conditions to be complied with for declaring dividend out of reserves. A pertinent question here is – whether a company can declare dividend out of 100% of the amount that has been transferred to General Reserve.
What is the 45 holding period? ›
Background: Holding Period Rule
The holding period rule requires shares to be held 'at risk' for a continuous period of at least 45 days (90 days for preference shares) during the qualification period.
How many months can you go exempt for? ›
An exemption from withholding is only good for one year. Employees must give you a new W-4 each year to keep or end the exemption.
What does exemption to the rule mean? ›
To exempt a person or thing from a particular rule, duty, or obligation means to state officially that they are not bound or affected by it.
What is dividend stripping with example? ›
Example of Dividend Stripping
He strategically purchases 50 shares at INR 200 each, investing a total of INR 10,000. Company XYZ declares dividends of INR 50 per share, providing Mr. A with INR 2,500 (50 * 50). After the dividend declaration, the share price drops to INR 150.
In order to receive the upcoming dividend, the holder has to own the shares before the ex-dividend date. The minimum 60-day holding period rule also applies to mutual funds. For preferred stocks, the shares have to be held for over 90 days during a 181-day period that begins 90 days before the ex-dividend date.
What is the holding period for dividends? ›
A dividend is considered qualified if the shareholder has held a stock for more than 60 days in the 121-day period that began 60 days before the ex-dividend date. 2 The ex-dividend date is one market day before the dividend's record date.
How much tax do I pay on fully franked dividends? ›
Fully franked dividends – When the corporate tax rate of 30% has been applied to 100% of the dividend. Partially franked dividends – When the 30% corporate tax rate has been applied to a portion of the dividend. Unfranked dividends – When no tax has been deducted from the dividend.
What is a franking credit for dummies? ›
A franking credit is your share of tax paid by a company on the profits from which your dividends or distributions are paid. A franking credit is also known as an: imputation credit. imputation tax credit.
How do you calculate franking credits on a dividend? ›
This is the standard calculation for calculating franking credits: Franking credit = (dividend amount / (1-company tax rate)) - dividend amount.
What is the 25 special dividend rule? ›
If the dividend is 25% or more of the stock value, special rules apply to the determination of the ex-dividend date. In these cases, the ex-dividend date will be deferred until one business day after the dividend is paid.
How often can you withdraw dividends? ›
There's no limit, and no set amount – you might even pay your shareholders different dividend amounts. Dividends are paid from a company's profits, so payments might fluctuate depending on how much profit is available.
How long do you have to hold stock for dividend payout? ›
The ex-dividend date is the first day the stock trades without its dividend, thus ex-dividend. If you want to get the dividend payment, you need to own the stock by this day. That means you have to buy before the end of the day before the ex-dividend date to get the next dividend.
How long do you have to cash a dividend check? ›
In most cases dividend cheques are valid for 6 months. Did you know: Dividends can be paid directly into your bank account.
