Information about when you are and are not entitled to claim a franking tax offset.
Your franking tax offset
If you are paid or credited franked dividends or non-share dividends (that is, they carry franking credits for which you are entitled to claim franking tax offsets) your assessable income includes both the amount of the dividends you were paid or credited and the amount of franking credits attached to the dividends. You must include both amounts when you lodge your tax return. Tax is payable at your applicable tax rate on these amounts.
If the franking credit is included in your assessable income at U item 11, you are then entitled to a franking tax offset equal to the amount included in your income. It is not necessary for you to claim the tax offset. It will appear on your notice of assessment.
The franking tax offset can be used to reduce your tax liability from all forms of income (not just dividends), and from your taxable net capital gain. Example 4 shows you how this works.
Any excess franking tax offset amount is refunded to eligible resident individuals, after any income tax and Medicare levy liabilities have been met.
Example 5: Impact of franking tax offsets
Tax return item
Tax payable on taxable income
less Other tax offsets
Net tax payable
plus Medicare levy
less Franking tax offset
Refund (of excess franking credits)
Note: Amounts are for illustrative purposes only.End of example
If you are eligible to claim a franking tax offset for 2021–22 but you are not otherwise required to lodge a tax return, see Refund of franking credits instructions and application for individuals 2022.
Your entitlement to a franking tax offset may be affected by the holding period rule, the related payments rule or the dividend washing integrity 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 the purpose of obtaining franking credits (referred to as franking credit trading).
For more information, see:
- Holding period rule
- Related payments rule
- Dividend washing integrity rule
- Disclosure on your tax return (all years)
- Application of the rules to interests in partnerships and trusts
The holding period rule requires you to continuously hold shares ‘at risk’ for at least 45 days (90 days for certain preference shares) to be eligible for the franking tax offset. However, under the small shareholder exemption this rule 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 (for companies that are not base rate entities, with a corporate tax rate of 30%), or
- $13,181 (for companies that are base rate entities, with a corporate tax rate of 27.5%), or
- $14,230 (for companies that are base rate entities, with a corporate tax rate of 26%).
This means that you must continuously own shares ‘at risk’ for at least 45 days (90 days for certain preference shares) not counting the day of acquisition or disposal, to be eligible for 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.
The financial risk of owning shares may be reduced through arrangements such as hedges, options and futures.
If you acquire shares, or an interest in shares, and you have not already satisfied the holding period rule before the day on which the shares become ex-dividend, the holding period rule commences on the day after the day on which you acquired the shares or interest. The shares become ex-dividend on the day after the last day on which acquisition of the shares will entitle you to receive the dividend. You must hold the shares or interest for 45 days (90 days for certain preference shares) excluding the day of disposal. For each of these days you must have 30% or more of the ordinary financial risks of loss and opportunities for gain from owning the shares or interest.
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 6: Franking credits entitlement greater than $5,000
Matthew acquired a single parcel of shares on 1 March 2022. On 8 April 2022 Matthew received fully franked dividends of $13,066 (which had franking credits attached of $5,600) for 2021–22. On 10 April 2022 Matthew sold that parcel of shares. Because he had not held the shares for at least 45 days and did not qualify for the small shareholder exemption, he failed the holding period test and cannot obtain the benefit of the franking credits.
Matthew shows a dividend of $13,066 as a franked amount at T item 11 on his 2022 tax return but does not show the amount of franking credits at U.
He will not receive a franking tax offset in his assessment. That is, he is not entitled to any part of the $5,600 franking credits.End of example
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 7: Substantially identical shares
Jessica has held 10,000 shares in Mimosa Pty Ltd for 12 months. She purchased an additional 4,000 shares in Mimosa Pty Ltd 10 days before they became ex-dividend (the day after the last day on which acquisition of the shares will entitle you to receive a dividend) and then sold 4,000 shares 20 days after Mimosa Pty Ltd shares became ex-dividend. Her total franking credit entitlement 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 is not entitled to the franking credits on the 4,000 shares sold.End of example
In certain circumstances, the related payments rule prevents you from claiming the franking credits attached to franked dividends if a related payment is made. This rule applies if you make a 'related payment', for instance you or an associate are under an obligation to pass on the benefit of the franked dividend to someone else.
You must be a ‘qualified person’ for the payment of each dividend or distribution to claim the franking credits attached to franked dividends.
Where there has been a related payment, to be a ‘qualified person’ in relation to a dividend or distribution, you must hold the relevant shares ‘at risk’ for the period beginning on the 45th day before and ending on the 45th day after the day on which the shares became ex-dividend (90 days before and after 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 pass on those dividends or distributions to someone else. That is, the related payments rule must be satisfied for all subsequent dividends and distributions.
The integrity rule prevents you from claiming more than one set of franking credits where you have received a dividend as a result of dividend washing.
Dividend washing occurs where:
- you, or an entity connected to you, sell an interest in shares that you hold while retaining the right to a dividend, then
- by using a special ASX trading market, you purchase some substantially identical shares.
If the dividend washing integrity rule applies, you are not entitled to a tax offset for the franking credits for the second dividend. However, if your interest in the second parcel of shares exceeds the interest in the first parcel, you may be entitled to claim a portion of these additional franking credits. For more information, see Dividend washing rule.
The integrity rule generally applies to all resident taxpayers, but there is an exception. The integrity rule generally does not apply to individuals who receive $5,000 or less in franking credits in a year, which we call the small shareholder exemption.
This exemption only applies when the dividend that was received as a result of dividend washing has been received by the individual directly. It does not apply where the dividend flows indirectly to an individual through their interest in a trust or partnership.
Individuals who receive $5,000 or less in franking credits in an income year should however be aware that the Commissioner may apply the general anti-avoidance rules if they have entered into a scheme for the purpose of obtaining franking credit benefits.
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 item 11. Do not show the amount of any franking credit at U Franking credit item 11.
If you have interests in partnerships 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 required 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).
Continue to: Deductions from dividend income