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Holding period rule (45 day rule)

Discussion in 'Accounting, Tax & Legal' started by Rod_WA, 19th Jun, 2007.

  1. Rod_WA

    Rod_WA Well-Known Member

    18th May, 2007
    Inglewood, WA
    Can somebody please clarify something for me.

    I have always thought that the holding period rule was 45 days (not including buy or sell day), eg 23 days before and 23 days after the ex-date is fine. I've never thought that it had to be 45 days before and 45 days after, as suggested by The Income Investor in the article Dazzled by dividend dates? from 17 April 2006:
    To make matters worse, the Tax Office may not let you have your franking credits if you don’t hold your shares for long enough. Under what’s known as the ‘45-day rule’, if your total franking credits for a year exceed $5,000, you won’t get any credits in respect of any shares that you don’t hold for either 45 days before the relevant ex date or 45 days after it (apparently 44 days before and 44 days after won’t do—no-one ever said the tax system made any sense).

    This from the ATO website:
    The holding period rule applies to shares bought on or after 1 July 1997. It will apply to you if you sell shares within 45 days of buying them. It also applies if you enter into a risk diminution arrangement, such as a derivative transaction, within that time. The holding period is 90 days for certain preference shares.

    And this from the ATO's You and Your Shares 2006:
    The holding period rule requires you to hold shares ‘at risk’ for at least 45 days (90 days for preference shares) to be eligible for the franking tax offset. However, this rule does not apply if your total franking credit entitlement is below $5,000, which is roughly equivalent to receiving a fully franked dividend of $11,666 (based on the current tax rate of 30% for companies).
    All this means is that you must own shares for at least 45 days, or 90 days for preference shares (not counting the day of acquisition or disposal), before being entitled to any franking tax offset...
    You have to satisfy the holding period rule once only for each purchase of shares. You are then entitled to the franking credits attached to those shares...

    My reading of the ATO paragraphs seems to support any 45 days, not 44 + 44 = 88 days!
    But I always assume that the guys at The Income Investor are close to the front of the pack.

    Thanks in advance!
  2. handyandy

    handyandy Well-Known Member

    6th Jun, 2006
    Sydney Nsw
    I think they just used bad wording.

    "either 45 days before the relevant ex date or 45 days after it (apparently 44 days before and 44 days after won’t do—no-one ever said the tax system made any sense)."

    The 'and' should have been an 'or' in which case it is consistent with their initial statement.

    My understanding is cartainly that it is 45 days only regardless of where the div falls in that period.

    One aspect that I learned about the other day was the 'at risk' aspect. I am not sure how the ATO would know whether you did a 'limit risk' trade as the two trades are not directly associated and if there was risk then who would care about the div's.