45 day rule - what does it mean to you? - Aston Accountants (2024)

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45 day rule - what does it mean to you? - Aston Accountants? ›

The 45 day rule (sometimes called dividend stripping

The 45 Day Rule, also known as the Holding Period Rule, requires resident taxpayers to continuously hold shares "at risk" for at least 45 days (90 days for preference shares, not including the day of acquisition or disposal) in order to be entitled to the Franking Credits as a franking tax offset.

There is an exemption if you are an individual shareholder and the total franking credits you are claiming in the tax year is less than $5,000. That exemption may also apply to partnerships and some trusts but it may not too. 45 days means 47 days because the purchase and sale dates are excluded.

The primary qualification period begins the day after the shares are acquired, and ends 45 days after the ex-dividend date. If a shareholder purchases substantially identical shares over a period, the holding period rule applies a 'last in first out' method to establish which shares satisfy the holding period rule.

Holding period rule

To be eligible for a tax offset for the franking credit you are required to hold the shares 'at risk' for at least 45 days (90 days for preference shares and not counting the day of acquisition or disposal). The holding period rule only needs to be satisfied once for each purchase of shares.

The 45-Day Rule for a 1031 Exchange

The 45-day rule for 1031 exchanges — or the identification (ID) period — states that an investor has 45 days from the date of the sale of the relinquished property to identify replacement properties.

Measured from when the relinquished property closes, the Exchangor has 45 DAYS to nominate (identify) potential replacement properties and 180 days to acquire the replacement property. The exchange is completed in 180 days, not 45 days plus 180 days.

Another important note to consider: as long as you purchase a stock prior to the ex-dividend date, you can then sell the stock any time on or after the ex-dividend date and still receive the dividend. A common misconception is that investors need to hold the stock through the record date or pay date.

The stock price drops by the amount of the dividend on the ex-dividend date. Remember, the ex-dividend date is the day before the record date. If investors want to receive a stock's dividend, they have to buy shares of stock before the ex-dividend date.

If you buy a stock one day before the ex-dividend, you will get the dividend. If you buy on the ex-dividend date or any day after, you won't get the dividend. Conversely, if you want to sell a stock and still get a dividend that has been declared, you need to hang onto it until the ex-dividend day.

What is the 45 day rule last in first out? ›

If (after applying the LIFO method) the shares or interest in shares weren't held at risk for a continuous period of at least 45 days during the relevant qualification period, the taxpayer isn't a qualified person in relation to the franked dividend. They won't be entitled to the relevant franking credits.

A franking credit is your share of tax paid by a company on the profits from which your dividends or distributions are paid. A franking credit is also known as an: imputation credit. imputation tax credit.

Depending on their tax bracket, investors who receive a franking credit may get a reduction in their income taxes or a tax refund. Franking credits help promote long-term equity ownership and have led to an increase in dividend payouts to investors.

According to the 2-out-of-5-years rule, property that you lived in for at least two out of the last five years counts as a primary residence, even if you have considered it a vacation rental.

In order to receive the upcoming dividend, the holder has to own the shares before the ex-dividend date. The minimum 60-day holding period rule also applies to mutual funds. For preferred stocks, the shares have to be held for over 90 days during a 181-day period that begins 90 days before the ex-dividend date.

The kind of dividend stripping tax avoidance schemes described above presently fall under anti-avoidance provisions of the Income Tax Assessment Act part IVA amendments introduced in 1981. Part IVA is a set of general anti-avoidance measures addressing schemes with a dominant purpose of creating a tax benefit.

This practice is termed as dividend stripping. As a result of this activity, the investor receives tax-free dividends. But since the sale made after receiving the dividend is done at a price lower than the purchase price, it results in a capital loss. You can adjust such losses against any other capital gains income.