The ’45 Day Rule’ Details
In order to be eligible to claim the benefit of a franking credit attached to a dividend payment, an investor must have held the share in question “at risk” for at least 45 days continuously.
This rule aims to prevent investors buying shares immediately before a company declares a dividend, receiving the dividend and franking credit, and then disposing of the shares immediately.
The ATO says the 45-day rule applies to shares bought after July 1, 1997 but that does not apply to investors who receive less than $5,000 of franking credit entitlements in a financial year.
The ATO says that to receive $5,000 of franking credits, an investor would have to receive $11,666 of fully-franked dividends, assuming a corporate tax rate of 30 per cent.
Information published by Macquarie says that “days on which an investor has 30 per cent or less of the ordinary financial risks of loss and opportunities for gain from owning the shares cannot be counted in determining whether the investor has held the shares ‘at risk’ for a period of 45 days.”
There are certain strategies- involving for example, options or warrants- that may significantly limit an investor’s risk of loss. In these cases, investors may forgo the benefits of the franking credits attached to the dividends.
If an investor fails to meet the 45 day rule, he or she is not required to gross-up their assessable income to include the denied franking credits in their income tax return. This means he or she will only be subject to the tax on the cash amount of the dividend received in respect of that particular parcel of shares to which the denied franking credits relate.
The rule is slightly different for preference shares. The required holding period is extended to 90 days, and the ATO says the 90 – day rule applies even if the investor receives less than $5,000 of franking credit entitlements. There are also other technical issues associated with franking credits and holding periods that both investors and financial planners need to be familiar with to avoid complications.
If you would like more information on the 45 – day rule or are looking to invest in shares our experienced accountants can assist you here at The Quinn Group. Submit an online enquiry or call us on 1300 QUINNS (1300 784 667) or +61 2 9223 9166 to arrange an appointment.