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 an imputation/ franking credit attached to the dividend, you are not entitled to claim the imputation/ franking credit.
Holding period rule
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 imputation/ 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 imputation/ franking credits attached to those shares, unless the related payments rule applies.
Example: Imputation/ franking credits entitlement greater than $5,000
Matthew received fully franked dividends of $13,066 (which include imputation/ franking credits of $5,600) for the 2002-03 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 imputation/ franking credit.
Matthew would show a dividend of $13,066 as a franked amount at T item 11 on his 2002-03 tax return but would not show the amount of imputation/ franking credit at U.
He would not receive a franking tax offset in his assessment.
End of exampleFor 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 shares 10 days before Mimosa Pty Ltd shares go ex-dividend. Jessica sells 500 shares 20 days after Mimosa Pty Ltd shares go ex-dividend (see note). Her total imputation/ 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 imputation/ franking credits on the 500 shares sold.
Note: 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.
End of exampleRelated payments rule
In certain circumstances, the related payments rule prevents you from claiming the imputation/ 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 are under an obligation to 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 or your associate 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. That is, the test must be satisfied for all subsequent dividends and distributions.
Disclosure on your income tax return (all years)
Where you are not entitled to a franking tax offset, show on your tax return the amount of franked dividend received at T Frankedamount. Do not show the amount of any imputation/ franking credit at U Imputation credit.
Application of the rules to interests in partnerships and trust
If you have interests in partnerships and 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).