Franking tax offsets

Your franking tax offset

If a company pays or credits you franked dividends or non-share dividends (that is, they carry franking credits for which you're entitled to claim franking tax offsets), your assessable income includes both the dividends you are paid or credited, and the 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 you include the franking credit in your assessable income, you're then entitled to a franking tax offset equal to the amount included in your income. It's not necessary for you to claim the tax offset. It will appear on your notice of assessment.

You can use the franking tax offset 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.

You'll receive a refund for any excess franking tax offset amount, if you're an eligible resident individual, after your income tax and Medicare levy liabilities are met.

Claiming your franking tax offset when you don't need to lodge a tax return

If you can claim a franking tax offset for 2024–25 but you're not otherwise required to lodge a tax return, see Refund of franking credits application and instructions 2025.

When you're not entitled to claim a franking tax offset

The holding period rule, the related payments rule or the dividend washing integrity rule may affect your entitlement to a franking tax offset. 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're not entitled to claim the franking credit. 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), your entitlement to a franking tax offset could also be affected.

For more information, see:

• Disclosure in your tax return (all years)
• Application of the rules to interests in partnerships and trusts.

Holding period rule

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 able to claim the franking tax offset. However, under the small shareholder exemption this rule doesn't 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 aren't base rate entities, with a corporate tax rate of 30%)
• $13,181 (for companies that are base rate entities, with a corporate tax rate of 27.5%)
• $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 able to claim any franking tax offset.

You can't count the days which you have 30% or less of the ordinary financial risks of loss and opportunities for gain from owning the shares in determining whether you hold the shares for the required period.

Arrangements such as hedges, options and futures may reduce the financial risk of owning shares.

If you acquire shares, or an interest in shares, and you haven't 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 only have to satisfy the holding period rule once for each purchase of shares. You're then entitled to the franking credits attached to those shares, unless the related payments rule applies.

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.

Related payments rule

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’ for 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 doesn't mean that you're 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. The related payments rule must be satisfied for all subsequent dividends and distributions.

Dividend washing integrity rule

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're 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 able to claim a portion of these extra franking credits.

If you receive $5,000 or less in franking credits in a year, you're exempt from the integrity rule under the small shareholder exemption. The integrity rule generally applies to all other resident taxpayers.

This exemption only applies when you directly receive the dividend as a result of dividend washing. It doesn't apply where the dividend flows indirectly to you through an 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.

Disclosure in your tax return (all years)

If you're not entitled to a franking tax offset, show in your tax return the amount of franked dividend received. Don't show the amount of any franking credit.

Application of the rules to interests in partnerships and trusts

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: Franking credits attached to a partnership or trust distribution

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