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  • Small shareholder exemption (13 May 1997 to 30 June 1999)

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    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

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    The holding period rule is subject to a small shareholder exemption. Under this exemption the rule does not apply to an individual shareholder who elects for the small shareholder exemption to apply and whose entitlement to franking rebates for the year from all franked dividends, received directly or indirectly through partnerships or trusts, would otherwise be $2,000 or less. This is roughly equivalent to receiving a fully franked dividend of $3,500.

    Phasing out arrangements operate for shareholders whose franking rebate entitlement is between $2,000 and $2,500-that is, for shareholders who receive fully franked dividends in the approximate range of $3,500 to $4,500.

    The effect of the phasing out arrangements is that where you have a franking rebate entitlement in excess of $2,000-but not greater than $2,500-you must reduce your claim by $4 for every $1 of franking rebate in excess of $2,000.

    Where you are denied a franking rebate you are allowed a deduction up to a maximum of $2,500 for the grossed-up amount of a dividend which is included in your assessable income. However, for administrative reasons, you do not have to include the grossed-up amount in your assessable income and then claim a deduction. Merely reduce your assessable income by the grossed-up amount and do not claim a deduction. The 'Sonya' example below, Franking rebate entitlement greater than $2,000 but less than or equal to $2,500, demonstrates this approach.

    Example

    Franking rebate entitlement $2,000 or less

    Linda received fully franked dividends of $3,500 and imputation credits of $2,000. Although she did not hold the shares for more than 45 days, the holding period test did not apply. She was entitled to claim the full franking rebate of $2,000.

    Linda would show the following information at item 9 on her 1997-98 tax return:

    a dividend of $3,500 as a franked amount at T

    an amount of $2,000 as an imputation credit at U.

    She would receive a franking rebate of $2,000 in her assessment.

    Example

    Franking rebate entitlement greater than $2,000 but less than or equal to $2,500

    Sonya received fully franked dividends of $4,000 and imputation credits of $2,250. However, because she did not hold the shares for more than 45 days, she failed the holding period test. Instead of losing her full rebate entitlement, she elected to have the small shareholder exemption apply.

    To determine her entitlement, because her imputation credits are in the $2,000 to $2,500 range she must make the following calculation.

     

    $

    Franking rebate entitlement(based on a fully franked dividend of $4000)

    2,250

    Less maximum franking rebate allowable (due to holding period rule)

    2,000

    Excess

    250

    Maximum franking rebate allowable (due to holding period rule)

    2,000

    Less reduction in franking rebate entitlement (reduced by $4 for every dollar the entitlement exceeds $2000: $250 X 4)

    1,000

    Reduced franking rebate entitlement (due to holding period rule)

    1,000

     

    Instead of getting the full benefit of the imputation credit of $2,250, Sonya was entitled only to a franking rebate of $1,000, a result which would ordinarily flow from an imputation credit of $1,000.

     

    Sonya's position can be summarised as follows:

    Franked dividends

    4,000

    Reduced imputation credit amount

    1,000

    Taxable income

    5,000

    Reduced franking rebate entitlement

    1,000

     

    Sonya would have shown the following information at item 9 on her 1997- 98 tax return.

    • a dividend of $4,000 as a franked amount at T
     
    • an amount of $1,000 as an imputation credit at U
     

    Sonya would have received a franking rebate of $1,000 in her assessment.

    Example

    Franking rebate entitlement greater than $2,500

    Andrew received fully franked dividends of approximately $5,000 and imputation credits of $2,750. However, because he did not hold the shares for more than 45 days he failed the holding period test.

    Andrew could not elect to have the small shareholder exemption apply. He lost the benefit of the franking rebate.

    Andrew would have shown a dividend of $5,000 as a franked amount at T item 9 on his 1997-98 tax return but would not have shown the amount of the imputation credit at U.

    He would not have received a franking rebate in his assessment.

    Last modified: 05 Dec 2006QC 16138