Q. The 45 day rule re franking credits.  Do you have to own the shares for 45 days before the ex dividend date.

A. You are entitled to claim a franking tax offset on a dividend provided you own the shares for at least 45 days.

You must continuously own the shares for 45 days excluding the day of purchase or sale.  The holding period commences on the day after purchase.  The day prior to the ex-dividend date is the last day you can acquire shares with a right to a dividend.

Even though a dividend statement will be issued to you noting an entitlement to a franking credit, if you don’t satisfy the above test, you are not entitled to utilize the franking credits.

Under small shareholder exemptions, this rule does not apply if your total franking credit entitlement is less than $5000.  This is roughly equivalent to receiving a fully franked dividend of $11,666. Note this concession only applies to individuals.  There is no exemption for Self Managed Super funds, companies or Trusts

The ATO has provided a worked example on their website:

Matthew acquired a single parcel of shares on 1 March 2012. On 8 April 2012 Matthew received fully franked dividends of $13,066 (which included franking credits of $5,600) for the 2011-12 income year. On 10 April 2012 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 would show a dividend of $13,066 as a franked amount on his 2012 tax return but would not show the amount of franking credits.  He would not receive a franking tax offset in his assessment. That is, he is not entitled to any part of the $5,600 franking credits.



Follow Andrew on Twitter @AndrewHeavenFP.  This article was originally published in The Australian.