Application of the holding rule to deny franking credits

Updated June 2013

What is the holding period rule?

In order for an investor to be eligible to claim the benefit of a franking credit attached to a dividend, they must have held the share 'at risk' for at least 45 continuous days, not including date of purchase and date of sale. Where the 45 day holding requirement has not been satisfied, the holding period rule (also known as the 45 day rule) may apply to deny the franking credits attached to the dividend received in respect of the particular share.

The holding period rule is intended to prevent investors from buying shares immediately before dividends are declared and selling immediately after, thereby obtaining the tax benefit of the franking credit.

What does 'at risk' mean?

Days on which an investor has less than 30% of the ordinary financial risks of loss and opportunities for gain from owning the shares cannot be counted in determining whether the investor has held the shares 'at risk' for a period of 45 days.

Transactions such as granting options or warrants over shares or entering into a contract to sell shares may have the effect of materially diminishing the investor's risk of loss and opportunity for gain in respect of the shares.

As Wrap does not know the complete circumstances of any particular investor, we assume that all shares are held 'at risk'. It will be up to the individual investor to determine whether or not the 'at risk' requirement has been met.

Does the holding period rule need to be satisfied each year for the same shares?

No – an investor only has to satisfy the holding period rule once for each parcel of shares. Once an investor has satisfied the holding period rule in respect of a particular parcel of shares, they are then entitled to the benefit of any franking credits attached to the dividends from those shares.

What happens when an investor does not satisfy the holding period rule?

Should an investor not satisfy this holding period rule, the benefit of any franking credits attached to dividends received will be denied to the investor.  The investor will not be required to gross up their assessable income to include the denied franking credits in their income tax return. The investor will also not be entitled to claim the denied franking credits as a tax offset. As a result, the investor will only be subject to tax on the cash amount of the dividend received in respect of that particular parcel of shares to which the denied franking credits relate.

Is there an exemption for small investors?

The holding period rule does not apply if the total franking credit entitlement of an investor (who is an individual) is less than or equal to $5,000 in a particular income year. This is roughly equivalent to receiving fully franked dividends of $11,666.

Wrap does not apply the small investor exemption. The reason for this is that an investor may receive franking credits from assets held outside their Wrap portfolio and these may impact their ability to claim the small investor exemption.

Is the rule different for preference shares?

Yes. Where an investor holds a preference share, the holding period rule requires a preference share to be held for 90 days (not including date of purchase and date of sale) rather than for 45 days.

Wrap does not generally distinguish between preference shares and ordinary shares for the purposes of calculating any franking credits which may be denied as this would significantly delay the time by which investors would receive their Tax Report, assuming all other information relating to their Tax Report had been received and processed. This means that, in these circumstances, Wrap only performs the holding period rule on preference shares for a period of 45 days rather than 90 days. It will be up to the investor, or their accountant, to perform the 90 day rule for preference shares. Where the investor has more complex securities and hence their Tax Report cannot be finalised until more than 90 days after year end, Wrap will perform the 90 day rule calculation.

How is calculation of the holding period rule impacted where shares are purchased in numerous parcels?

Where shares are disposed of during an income year, for the purposes of denying any credits, the holding period rule deems that the most recently acquired shares are sold first.

How does Wrap calculate and report franking credit entitlements?

Wrap applies the holding period rule having regard to assumptions and limited information regarding the circumstances of each investor. Investors should consult the Tax Guide for more information.

The amount of credits denied is shown on the Tax Report – Summary and the Tax Report – Detailed. The Denied Franking Credit section of the Tax Report – Detailed discloses the amount of credits denied on an asset by asset basis.