45 day rule – what does it mean to you?
When you purchase shares in the share market, the companies that you have shares in may declare a dividend. In most cases, the dividend amount comes with a franking credit, which is a rebate that shareholders get for the tax paid by the company. The amount of franking credit that you can claim is shown on the dividend statements that are issued to you.
You will then declare the amounts shown on the dividend statements on your tax return, where the franking credits will be taken into account when calculating your income tax liability.
But do you know that there are instances you may not be eligible to claim all the franking credits you have received?
The 45 day rule
The 45 day rule (sometimes called dividend stripping) requires shareholders to have held the shares ‘at risk’ for at least 45 days (plus the purchase day and sale day) in order to be eligible to claim franking credits in their tax returns. If you have held your share for less than 45 days then you cannot claim the franking credits in the dividends you have received. The rule is designed to prevent franking credits to be claimed by share traders who hold shares for a short period of time and then sell as soon as they qualify for a dividend. The rule applies to all individual taxpayers, entities and SMSF.
Claire purchased some shares of a listed company on 1 January. On 25 January the company has paid a fully franked dividend of $7,000 with $3,000 franking credits.
On 31 January, Claire sold all her shares in that company at a profit.
Because Claire has not held her shares ‘at risk’ for more than 45 days, she is not eligible to claim the franking credits that she has received. What’s worse, is that she has to declare the $7,000 dividend as income in her tax return, without the benefit of the $3,000 franking credits.
Exemption to the 45 day rule
The 45 day rule is not strictly applied to all share investors. The ATO has allowed small shareholders to be exempt from this harsh rule by introducing the small shareholder exemption.
The Small Shareholder Exemption allows shareholders who received total franking credits that is less than $5,000 for the financial year to claim their franking credits in their tax returns, even when they may not have held the shares at risk for 45 days.
The 45 day rule extends to a 90 day limit for preference shareholders, meaning that they do not qualify to claim franking credits in their tax returns unless they have held their preference shares for more than 90 days (plus purchase day and sale day).
At Aston Accountants, we are experienced in helping share investors work out whether their dividends are caught under the 45 day rule, whether you are trading under your own name, under your company or a trust structure. Contact us to see how we can assist.