Dividend Stripping (45-Day Rule) | SMSF Warehouse (2024)

FAQs

What is the 45 day rule for dividend stripping? ›

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.

Exemption to the 45 day rule

The Small Shareholder Exemption allows shareholders who received total franking credits that is less than $5,000 for the financial year to claim their franking credits in their tax returns, even when they may not have held the shares at risk for 45 days.

Holding period rule

To be eligible for a tax offset for the franking credit you are required to hold the shares 'at risk' for at least 45 days (90 days for preference shares and not counting the day of acquisition or disposal). The holding period rule only needs to be satisfied once for each purchase of shares.

If (after applying the LIFO method) the shares or interest in shares weren't held at risk for a continuous period of at least 45 days during the relevant qualification period, the taxpayer isn't a qualified person in relation to the franked dividend. They won't be entitled to the relevant franking credits.

What is Dividend Stripping. Investors, in a bid to avail maximum tax benefits from an investment, buy shares/mutual fund units before the declaration of dividend, post the dividend declaration they sell the share/unit when its price falls below the purchase price. This practice is termed as dividend stripping.

Rule 3 of Dividend Rules prescribes the conditions to be complied with for declaring dividend out of reserves. A pertinent question here is – whether a company can declare dividend out of 100% of the amount that has been transferred to General Reserve.

An exemption from withholding is only good for one year. Employees must give you a new W-4 each year to keep or end the exemption.

To exempt a person or thing from a particular rule, duty, or obligation means to state officially that they are not bound or affected by it.

According to the IRS, you can go exempt from tax withholdings as long as you meet specific criteria and don't exceed one year. However, it's important to exercise caution when considering this option repeatedly or for extended periods.

There's no minimum amount of time when an investor needs to hold on to stock. But, investments that are sold at a gain are taxed at a capital gains tax rate. This rate changes, depending on whether the investor held onto the stock for more or less than one year.

How long do you have to hold stock to avoid tax? ›

You may have to pay capital gains tax on stocks sold for a profit. Any profit you make from selling a stock is taxable at either 0%, 15% or 20% if you held the shares for more than a year. If you held the shares for a year or less, you'll be taxed at your ordinary tax rate.

Stock. You must have held those shares of stock unhedged for at least 61 days out of the 121-day period that began 60 days before the ex-dividend date. For certain preferred stock, the security must be held for 91 days out of the 181-day period beginning 90 days before the ex-dividend date.

To calculate a grossed-up fully-franked dividend you must divide the dividend yield by 70 and multiply by 100.

Franked dividends are paid to shareholders and holders of non-share equity interests out of profits on which the company has already paid tax.

Fully franked dividends – When the corporate tax rate of 30% has been applied to 100% of the dividend. Partially franked dividends – When the 30% corporate tax rate has been applied to a portion of the dividend. Unfranked dividends – When no tax has been deducted from the dividend.

If the dividend is 25% or more of the stock value, special rules apply to the determination of the ex-dividend date. In these cases, the ex-dividend date will be deferred until one business day after the dividend is paid.

There's no limit, and no set amount – you might even pay your shareholders different dividend amounts. Dividends are paid from a company's profits, so payments might fluctuate depending on how much profit is available.

The ex-dividend date is the first day the stock trades without its dividend, thus ex-dividend. If you want to get the dividend payment, you need to own the stock by this day. That means you have to buy before the end of the day before the ex-dividend date to get the next dividend.

In most cases dividend cheques are valid for 6 months. Did you know: Dividends can be paid directly into your bank account.