What is the 45 day holding rule?

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.

Does the 45 day rule apply to SMSF?

The 45-Day Rule applies to all SMSF’s regardless of the amount of Franking Credits. Your SMSF’s entitlement to Franking Credits may also be affected by the Related Payments Rule and the Dividend Washing Integrity Rule.

What is dividend washing?

Dividend washing occurs when investors seek to claim two sets of franking credits on what is effectively the same parcel of shares. From 1 July 2013, a specific integrity rule was enacted that denies the benefit of additional franking credits where dividends are received as a result of dividend washing.

Does dividend stripping work?

Investors. For an investor, dividend stripping provides dividend income, and a capital loss when the shares fall in value (in normal circumstances) 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.

When does the 45 day holding period end?

The qualification period begins the day after the shares are acquired, and ends 45 days after the ex-dividend date. The 45-day period does not include the day of acquisition or, if the shares have been disposed of, the day of disposal. Days where the financial risk of owning the shares is materially diminished are also excluded.

How does the holding period rule work in Australia?

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.

When did the 45 day rule come into effect?

Nonetheless the investor qualified for the franking credit in full with only an overnight risk in holding the stock. This presented a significant opportunity for investors to game the system by holding the shares for one day over the ex-dividend date. To counter this, on 1 July 2000, a 45-day rule was implemented.

How does hedging work under the 45 day rule?

In other words – hedging by buying put options (ie the right to sell the shares at a pre-determined price for a set period into the future) to cover the share position could only cover 70% of the total exposure. Each day that the overall exposure is under 30% does not count towards the required 45 days.