• When you are not entitled to claim a franking tax offset

    Your entitlement to a franking tax offset may be affected by the holding period rule and the related payments rule. The general effect of the holding period rule and the related payments rule is that even if a dividend is accompanied by a dividend statement advising that there is a franking credit attached to the dividend, you are not entitled to claim the franking credit. Your entitlement to a franking tax offset could also be affected if you or your company undertake a dividend streaming or stripping arrangement, or you enter into a scheme with a purpose of obtaining franking credits (referred to as franking credit trading).

    Holding period rule

    Attention

    Warning:

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

    End of attention

    The holding period rule requires you to hold shares 'at risk' for at least 45 days (90 days for preference shares) to be eligible for the franking tax offset. This rule, however, does not apply if your total franking credit entitlement is below $5,000. This is roughly equivalent to receiving a fully franked dividend of $11,666, based on the current tax rate of 30% for companies.

    All this means is that you must own shares for at least 45 days, or 90 days for preference shares (not counting the day of acquisition or disposal), before being entitled to any franking tax offset.

    Days on which you have 30% or less of the ordinary financial risks of loss and opportunities for gain from owning the shares cannot be counted in determining whether you hold the shares for the required period.

    Financial risk of owning shares may be reduced through arrangements such as hedges, options and futures.

    You have to satisfy the holding period rule once only for each purchase of shares. You are then entitled to the franking credits attached to those shares, unless the Related payments rule applies.

    Example
    Franking credits entitlement greater than $5,000

    Matthew received fully franked dividends of $13,066 (which include franking credits of $5,600 from a single parcel of shares) for the 2003-04 income year. However, because he did not hold the shares for at least 45 days, he failed the holding period test and lost the benefit of the franking credit.

    Matthew would show a dividend of $13,066 as a franked amount at T item 11 on his 2003-04 tax return but would not show the amount of franking credit at U.

    He would not receive a franking tax offset in his assessment. That is, he is not entitled to any part of the $5,600 franking credits.

    For the purpose of the holding period rule, if a shareholder purchases substantially identical shares in a company over a period of time, the holding period rule uses the 'last in first out' method to identify which shares will pass the holding period rule.

    Example
    Substantially identical share

    Jessica has held 1,000 shares in Mimosa Pty Ltd for 12 months. She then purchases an additional 500 shares10 days before Mimosa Pty Ltd shares go ex-dividend. Jessica sells 500 shares 20 days after Mimosa Pty Ltd shares go ex-dividend*. Her total franking credit for the income year was more than $5,000. The shares she sold are deemed to have been held for less than 45 days, based on the last in first out method. Jessica would not be entitled to the franking credits on the 500 shares sold.

    * A share or interest in a share becomes ex-dividend on the day after the last day on which you can acquire the share or interest in a share so as to entitle you to a dividend or distribution in respect of that share or interest.

    Related payments rule

    In certain circumstances, the related payments rule prevents you from claiming the franking credits attached to franked dividends or credited on shares if a related payment is made. This rule applies if both of the following conditions are present:

    • you or an associate are under an obligation to, in effect, pass on the dividend to someone else
    • you are not holding the shares 'at risk' around the dividend period.

    Under the related payments rule you must be a qualified person for the payment of each dividend or distribution.

    To be a qualified person in relation to a dividend or distribution, you must hold the relevant shares or interest at risk for the relevant qualification period of 45 days, or 90 days for preference shares.

    Being a qualified person for the payment of current dividends or distributions does not mean that you are automatically a qualified person for future dividends or distributions if you or an associate are under an obligation to, in effect, pass on those dividends or distributions to someone else. That is, the related payments rule must be satisfied for all subsequent dividends and distributions.

    Disclosure on your income tax return (all years)

    If you are not entitled to a franking tax offset, show on your tax return the amount of franked dividend received at T Franked amount. Do not show the amount of any franking credit at U Franking credit.

    Application of the rules to interests in partnerships and trusts

    If you have interests in partnerships and/or trusts, other than widely held trusts, which hold shares, the holding period rule and the related payments rule apply to your interests in the shares held by the partnership or trust in the same way that the rules apply to shares you own directly. Therefore, the partner or beneficiary has to hold their interest in the shares held by the partnership or trust at risk for the requisite period. The related payments rule will apply if they are not holding their interest in the partnership or trust at risk and they have an obligation to pass on their share of net income of the partnership or trust which is attributable to the franked dividend.

    If you have interests in a widely held trust, the holding period rule and related payments rule apply to your interest in the trust (rather than in the shares held by the trust).

    Last modified: 12 Jan 2005QC 27523