Issue
How can I identify parcels of shares which may not meet the 45 Day Rule?
Background
45 Day Rule
The 45 Day Rule, also known as the Holding Period Rule, requires resident taxpayers to continuously 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 the Franking Credits as a franking tax offset.
There is a small shareholder exemption where the 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 current tax rate of 30% for companies). This exemption only applies to individual taxpayers, it does not apply to the SMSF.
The Last-in First-out (LIFO) Rule
The LIFO rule operates to prevent taxpayers from manipulating the holding period that shares are required to be held "at risk" by buying new shares and choosing to sell other shares from their portfolio that have been held for a longer period.
The LIFO rule applies so that primary securities and related securities are brought together into a group (or bundle) for the purpose of applying the holding period rule. Once this group is established, the sale of any shares from the group is taken to be on a LIFO basis. This means that when a taxpayer sells a security that is included in the group within the relevant qualification period, the date that the security was acquired is taken to be the date on which the most recently acquired securities in the group were acquired.
The ATO update also provides an example to demonstrate how the LIFO rule operates.
For more information and example of how the LIFO rule operations, you can refer the ATO page Applying the LIFO Rule.
Resolution
The Investment Income Comparison Report
The Investment Income Comparison Report will assist you to identify any parcel of shares where the 45 Day Rule may be violated using the LIFO methodology.
- This is just a warning report. It does not automatically deny the franking credits. Refer to the knowledge article for How to process the dividend for shares where the Holding Period does not meet the 45 Day Rule
- This report does not cater for Preference shares where the 90 day Holding Period Rule applies
- This report also does not cater for distributions from managed funds and listed trusts where they may have frankable distributions
- This report does not cater for franking credits received via Share Buy-back events
- This report only applies to listed securities and is generated based on the ASX income announcement and not the generated events
For more information you can refer to Franking credits and the 45 day rule.