Dividend stripping is 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 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.
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. 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.
Accounting Treatment for the 45-Day Rule by Superannuation Warehouse
We use Simple Fund to prepare the Annual Return for all our SMSF clients. In Simple Fund the 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 page 1 and 2 here. To learn more about Franking Credits and investments in the SMSFs, please visit our Franking Credits and investments page.