Franking credit trading rules
Your not-for-profit organisation’s entitlement to a franking credit refund may be affected by the holding period rule and related payments rule.
These rules require taxpayers to meet certain criteria before they qualify for the benefits of franking. They ensure that only the true economic owners of the shares (or an interest in shares) have entitlement to the franking credits.
One of the underlying principles of the imputation system is that the true economic owners of the shares should receive the benefits. They are exposed to both the risks of loss and opportunities for gain in respect of the shares.
Holding period rule
Your organisation must hold shares (or an interest in shares) at risk for at least 45 days (or 90 days for preference shares) during the primary qualification period to be eligible for a refund of franking credits. If your organisation is under no obligation to make a related payment, this rule only needs to be met once for each purchase of shares.
The primary qualification period starts on the day after the day the organisation acquires the shares (or the interest). It ends on the 45th day (or 90th day for preference shares) after the day on which the shares (or the interest) go ex-dividend.
Related payments rule
This rule applies if your organisation has made, or is under an obligation to make, a related payment for a dividend. Your organisation must hold shares (or the interest) at risk for at least 45 days (or 90 days for preference shares) during the secondary qualification period to be eligible for franking credits. This rule must be met for all dividends and distributions where a related payment will be made.
The secondary qualification period begins on the 45th day before, and ends on the 45th day after, the day the shares (or the interest) became ex-dividend (or 90 days before and after if the shares are preference shares).
Qualified person test
To be entitled to a franking credit refund, your organisation is required to be a 'qualified person' in relation to the franked dividend. The qualified person test ensures that the true economic owners of the shares benefit from franking credits.
If your organisation receives franked dividends as a shareholder, you will meet the qualified person test if you satisfy both the:
- holding period rule
- related payments rule, where applicable.
If your organisation receives franked distributions as a beneficiary of a trust, where the trust is not a widely held trust or not a family discretionary trust, you will satisfy the qualified person test only if you have a fixed interest in the shares the trust holds from which the dividends are sourced.
This means that if your organisation is a beneficiary of a testamentary trust, you must have a vested and indefeasible interest in the shares held by the testamentary trust to be entitled to claim the franking credits on the franked distributions from those shares. An interest is vested when the holder has an immediate fixed right of present or future enjoyment. An indefeasible interest, also known as an absolute interest, is one that is not subject to any condition.
If your organisation is a beneficiary of a trust estate who is entitled to income only (and not the capital or corpus of the trust) you are not entitled to franking credits as you are deemed not to have sufficient economic interest in the shares that generate the franked dividends.
If your organisation receives franked dividends as a beneficiary of a trust, before making claim for franking credits, you should:
- confirm your interest in the trust and whether, for example, it includes an entitlement to income and to the capital or corpus of the trust estate
- obtain advice, where necessary, on the nature of your interest and whether you are eligible to claim franking credits on the income from the trust estate.
Integrity rules
If you are an exempt institution that is eligible for a refund, such as a registered charity, there are integrity rules that apply in certain situations to determine your eligibility for a refund of franking credits.
The integrity rules can apply to situations where the:
- payment or receipt of a franked distribution results in a detriment to the recipient exempt institution
- payment or receipt of a franked distribution results in a benefit to the entity making the distribution, or any other entity
- terms and conditions for making the franked distribution of property restrict the recipient exempt institution from obtaining full ownership of that property
- terms and conditions for making the franked distribution result in the recipient exempt institution, or any other entity, acquiring money or property in addition to the distribution
- exempt institution is a beneficiary of a trust and receives franked distributions that do not match the trust share amount.
Where the integrity rules apply, an exempt institution will not be eligible for a refund of franking credits.