Dividend strippingis the acquisition of shares just before a dividend is paid, and the sale of those shares straightaway after the dividend payment. The purpose of dividend stripping is to simultaneously acquire a share’s dividend, imputation credit and capital gain. Dividend stripping is seen as a tax avoidance scheme. The Tax Office has introduced the 45-Day Rule to stop investors manipulating the tax system by utilizing the dividend stripping strategy.
The 45-Day Rule requires resident taxpayers to hold sharesat riskfor at least 45 days (90 days for preference shares, not including the day of acquisition or disposal) in order to be entitled to Franking Credits.
The 45-Day Rule is one of theanti-avoidance rulesaimed at preventing the unintended use ofFranking Credits. It generally applies to shares bought on or after 1 July 1997. This holding period rule does not apply where an individual’s total Franking Credits entitlement for the Financial Year are below $5,000. The 45-Day Rule applies to all SMSF’s regardless of the amount of Franking Credits. This means that the $5,000 exemption that applies to individuals does not apply to SMSF’s. The holding period rule only needs to be satisfied once for each purchase of shares.
Your SMSF’s entitlement to Franking Credits may also be affected by theRelated Payments Ruleand theDividend Washing Integrity Rule.
We useSimple Fundto prepare theAnnual Returnfor all our SMSF clients. InSimple Fundthe way to record shares which have not met the 45-Day Rule is to record the dividend as fully unfranked. Hence, your SMSF will not obtain the benefit of the Franking Credits for the Financial Year in which the shares in your Fund were not held for at least 45 days. However, if your SMSF holds the shares for more than 45 days in the next Financial Year, your SMSF will then be entitled to the benefits of Franking Credits.
The ATO gives examples of how the 45-Day Rule works, please see the ATO examples on page1 and 2here. To learn more about Franking Credits and investments in the SMSFs, please visit ourFranking Creditsandinvestmentspage.
FAQs
The 45-Day Rule requires resident taxpayers to 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 Franking Credits.
What is the 45 day holding rule for the franking credit? ›
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.
What is the 45 day rule for ex dividends? ›
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.
What is the 45 day rule last in first out? ›
The Last-in First-out (LIFO) Rule
This means that when a taxpayer sells a security that is included in the group within the relevant qualification period, the date that the security was acquired is taken to be the date on which the most recently acquired securities in the group were acquired.
What is dividend stripping with an example? ›
Example of Dividend Stripping
He strategically purchases 50 shares at INR 200 each, investing a total of INR 10,000. Company XYZ declares dividends of INR 50 per share, providing Mr. A with INR 2,500 (50 * 50). After the dividend declaration, the share price drops to INR 150.
Does dividend stripping work? ›
For an investor, dividend stripping provides dividend income, and a capital loss when the shares fall in value (in normal circ*mstances) on going ex-dividend. This may be profitable if income is greater than the loss, or if the tax treatment of the two gives an advantage.
What is the required holding period for dividends? ›
A dividend is considered qualified if the shareholder has held a stock for more than 60 days in the 121-day period that began 60 days before the ex-dividend date.2 The ex-dividend date is one market day before the dividend's record date.
Do you get franking credits back? ›
You can claim a tax refund if the franking credits you receive exceed the tax you have to pay. This is a refund of excess franking credits. You may receive a refund of the full amount of franking credits received even if you don't usually lodge a tax return.
What are the holding period requirements? ›
The holding period of an investment is used to determine the taxing of capital gains or losses. A long-term holding period is one year or more with no expiration. Any investments that have a holding of less than one year will be short-term holds. The payment of dividends into an account will also have a holding period.
What is the new dividend rule? ›
Dividend payout ratio cap:
40% if net NPA is less than 1% 35% if net NPA is greater than or equal to 1% but less than 2% 25% if net NPA is greater than or equal to 2% but less than 4% 15% if net NPA is greater than or equal to 4% but less than 6%
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.
What happens if you own a stock before the ex-dividend date? ›
As noted above, the ex-date or ex-dividend date marks the cutoff point for a pending stock dividend. Some trading platforms, market data, and news services might add an XD modifier to the ticker symbol to show it is trading ex-dividend. If you buy a stock one day before the ex-dividend, you will get the dividend.
What is the dividend washing integrity rule? ›
The dividend washing integrity rule. The effect of the dividend washing integrity rule is that if you receive a dividend as a result of dividend washing, you are not entitled to a tax offset for the franking credits associated with the dividend received on the shares purchased on the special ASX trading market.
Do you have to sell stocks first-in, first-out? ›
First-in, first-out method (FIFO)
FIFO automatically assumes you're selling shares you held the longest. This is the default for all investments other than mutual funds.
What is a franking credit for dummies? ›
What Is a Franking Credit? Since corporations have already paid taxes on the dividends they distribute to their shareholders, the franking credit allows them to allocate a tax credit to their shareholders. Depending on their tax situation, shareholders might then get a reduction in their income taxes or a tax refund.
What is the 25 special dividend rule? ›
If the dividend is 25% or more of the stock value, special rules apply to the determination of the ex-dividend date. In these cases, the ex-dividend date will be deferred until one business day after the dividend is paid.
How often can you withdraw dividends? ›
There's no limit, and no set amount – you might even pay your shareholders different dividend amounts. Dividends are paid from a company's profits, so payments might fluctuate depending on how much profit is available. If the company doesn't have any retained profit, it can't make dividend payments.
What is the rule 3 of payment of dividends? ›
Rule 3 of Dividend Rules prescribes the conditions to be complied with for declaring dividend out of reserves. A pertinent question here is – whether a company can declare dividend out of 100% of the amount that has been transferred to General Reserve.
