45 Day Holding Rule for Franking or Imputation Credits – SMSF
What are Franking Credits (also known as Imputation Credits) and Why Are They Useful?
When an Australian company pays tax on its earnings and then later distributes those earnings to its shareholders as a franked dividend, a ‘tax credit’ is passed on to the investor. This tax credit is known as a franking credit or imputation credit. Many Self Managed Super Funds (SMSFs) hold investments in Australian shares which pay franked dividends and these credits help to effectively manage the SMSF’s tax liability. They do this because credits can be used to reduce the amount of tax payable on other income or be refunded when the tax return is lodged if the credits are greater than the amount of tax payable.
This is especially useful in an SMSF because of the 15% tax rate that applies to investment income in accumulation phase and 0% in pension phase compared to the 30% rate that companies pay.
The following examples will help to illustrate:
The XYZ Super Fund earns $2,100 in fully franked dividends and $1,000 in interest income during the year with no other transactions. The table below illustrates what its taxable position would look like if the fund were fully in accumulation phase and fully in pension phase and excludes the ATO’s Supervisory Levy:
As you can see from the examples, the franking credits were sufficient to not only pay all of the tax for the fund in accumulation phase but have $300.00 excess that was refundable while the full amount of the franking credits of $900.00 were refundable for the fund in pension phase.
Are all dividends from Australian companies fully franked and is the SMSF always entitled to those credits?
No, not all Australian companies pay franked dividends and not all that do are 100% fully franked. The SMSF is generally entitled to those credits as long as it meets the 45 day holding rule.
What is the 45 Day Holding Rule and When Does It Start and Stop?
In practical terms it means that the super fund must hold the shares for at least 45 days (90 days for some Preference shares) in order to be eligible to claim the franking credits against its tax liability.
The 45 days doesn’t include the day of acquisition or date of disposal so it is effectively 47 days. The acquisition and disposal dates are the dates the buy and sell contracts were entered into; not the settlement dates which generally occur 3 days later.
If the 45 day holding rule is not met the franked amount of the dividend is still included in taxable income and the franking credits are disregarded.
For the purposes of the holding period rule, the ‘last in, first out’ method is used to determine if the rule has been met. The following example is taken from the ATO website:
EXAMPLE 7: Substantially identical shares
Jessica has held 10,000 shares in Mimosa Pty Ltd for 12 months. She purchased an additional 4,000 shares in Mimosa Pty Ltd 10 days before they became ex-dividend (the day after the last day on which acquisition of the shares will entitle you to receive a dividend) and then sold 4,000 shares 20 days after Mimosa Pty Ltd shares became ex-dividend. Her total franking credit entitlement for the income year was more than $5,000. The shares she sold are deemed to have been held for less than 45 days, based on the last in first out method. Jessica would not be entitled to the franking credits on the 4,000 shares sold.
Individuals are given an exemption from this rule if the total amount of their imputation credits for the financial year is less than $5,000, but unfortunately SMSFs are not eligible for this exemption.
Disclaimer:The information is general in nature and for information purposes only. It does not take into consideration your personal circumstances or other information that may be relevant. It should not be considered as or relied upon as financial advice. You should seek financial advice from a qualified professional before making any financial or investment decisions in relation to this information.
