What are the anti-avoidance rules?
Resident individuals are not eligible for the tax offset or a refund of excess franking credits if the anti-avoidance rules are triggered. The anti-avoidance rules include the holding period rule and the related payments rule.
The holding period rule applies to shares bought on or after 1 July 1997. It requires the individual 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) to be eligible for a tax offset in relation to the franking credit. The holding period rule only needs to be satisfied once for each purchase of shares.
Note: This rule does not apply if the individual's total franking credits entitlement for the year of income is below $5,000.
The related payments rule applies to arrangements entered into after 7.30pm (Australian Eastern Standard Time) on 31 May 1997. It applies to an individual if they make, are under an obligation to make, or are likely to make, a 'related payment'. A related payment is a payment that passes on the benefit of the franked dividend to someone else.
If the rule applies, and the individual does not hold the shares 'at risk' for a period of 45 days (90 days for preference shares), the individual is prevented from receiving a tax offset in relation to the franking credits. The related payments test must be satisfied for each dividend payment and distribution.
Note: This rule applies even if the individual’s total franking credits entitlement for the year is below $5,000.
These two rules also apply in relation to beneficiaries of trusts and partners of partnerships.
If you are a partner in a partnership or a beneficiary of a trust, both you and the partnership or trust must satisfy the two rules to be eligible for the franking tax offset or refund of excess franking credits.
Small shareholder exemption
The small shareholder exemption allows you to ignore the holding period rule if all of your franking tax offset entitlements in a given year (whether received directly from a shareholding, or indirectly through a trust or partnership) total less than the maximum franking tax offset ceiling of $5,000.
If you qualify for the small shareholder exemption, you may still be entitled to a franking tax offset (provided that the related payments rule does not apply to you).
If you have a total of less than $5,000 in franking credits (whether from one parcel of shares or from more than one), you are entitled to a franking tax offset in respect of all shares that satisfy the related payments rule. In other words, the holding period rule does not prevent you claiming the franking tax offset in this case.
If you have more than $5,000 in franking credits from a single parcel of shares and did not satisfy the holding period rule in respect of those franking credits, you have no entitlement to a franking tax offset for the entire franking credits. In other words, you cannot claim the small shareholder exemption and restrict your claim of franking credits to a maximum of $5,000. Because you cannot claim a franking tax offset, you do not include the affected franking credits in your assessable income.
If you have a total of more than $5,000 of franking credits from a portfolio of shares made up of several parcels, you are entitled to a franking tax offset only in respect of those shares that satisfy the holding and related payments rules. Therefore, you cannot claim the franking tax offset in respect of any parcels of shares that fail either the holding or the related payments rule. If you cannot claim a tax offset for any dividends, you do not include those franking credits in your assessable income.
Last Modified: Tuesday, 30 June 2009
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