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 is one of the anti-avoidance rules aimed at preventing the unintended use of Franking 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.
What is the 45 day 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) 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 rule for dividend stripping? ›
An individual claiming short-term capital loss from the sale of a share must have purchased or acquired share units within 3 months before the record date. Such a person sells or transfers the securities within 3 months post the record date, 9 months in the case of mutual fund units.
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? ›
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.
How does the 45 day rule work? ›
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.
What is the 45 day stock rule? ›
Enacted in 2012, the Stop Trading on Congressional Knowledge (STOCK) Act requires members of Congress to report stock trades within 45 days of the transaction; failure to do so can result in civil and criminal penalties.
What is an example of dividend stripping? ›
For example, The stripper receiving a non-recoverable loan, instead of a dividend from the target company. The stripper selling a worthless asset to the company. Owners (without a separate stripper) selling a part interest in an asset to the company, but later changing the terms to reduce its value.
What is the dividend stripping strategy? ›
Dividend stripping is a short-term trading strategy. It's when you buy a stock shortly before a dividend has been declared with the intention of selling it immediately after the dividend is paid.
Is dividend stripping profitable? ›
The investor's objective is to sell the shares at a rate that, when added to the dividend income and even after considering this decline, still permits an overall profit. Although this approach has the potential to be profitable, there are drawbacks, including potential price volatility and tax implications.
As required by our Legal Terms, attorneys must disclose if any AI is used in answering your question. Whether or not you're in jail, weekends and holidays count as part of the 45 day time limit for making motions. 45 days means 45 calendar days. When weekends or holidays are excluded, the statute will say so.
What is the new dividend rule? ›
The government said all dividend received on or after 1 April 2020 is taxable in the hands of the investor/shareholder. The DDT liability on companies and mutual funds stands withdrawn. Similarly, the tax of 10% on dividend receipts of resident individuals, HUF and firms in excess of Rs.
What is the 45 day rule for trust distributions? ›
The current NOPA procedure for trust administrations requires a notice period of 45 days, during which a beneficiary may object to the proposed course of action. (Probate Code section 16502). Absent a formal objection during that period, the beneficiary is deemed to have consented to the proposed course of action.
What is dividend washing? ›
Dividend washing occurs when a taxpayer tries to take advantage of the special ASX trading market to generate an unintended outcome. They do this by: selling shares on the ordinary market on an ex-entitlement basis, thereby retaining the right to receive a franked dividend.
What is the minimum holding period for dividends? ›
Meeting the minimum holding period is the primary requirement for dividends to be designated as qualified. For common stock, the holding must exceed 60 days throughout the 120-day period, which begins 60 days before the ex-dividend date.
Which is the best example of the First In, First Out rule? ›
Grocery store stock is a common example of using FIFO practices in real life. A grocery store will usually try to sell their oldest products first so that they're sold before the expiration date. This helps keep inventory fresh and reduces inventory write-offs which increases business profitability.
How is the IRS holding period calculated? ›
To figure the holding period, begin counting on the day after you received the property and include the day you disposed of the property. You may have to make estimated tax payments if you have a taxable capital gain.
What is the holding period rule? ›
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.
How long to hold stock to avoid tax? ›
Generally, any profit you make on the sale of an asset is taxable at either 0%, 15% or 20% if you held the shares for more than a year, or at your ordinary tax rate if you held the shares for a year or less. Any dividends you receive from a stock are also usually taxable.
