Q: Could you please advise me if the 45-day holding rule applies to shares held in an SMSF when the fund has accumulated less than $5,000 in franking credits during the entire financial year?
A SMSF must hold company shares for at least 45 days (plus the day of purchase and day of disposal) to be entitled to franking credits.
Note that the 45-day rule doesn’t apply where an INDIVIDUAL’s total franking credit entitlements for the financial year are below $5,000.
The $5,000 ceiling however is NOT available to SMSFs because an SMSF is not a natural person. What this means is that for an SMSF, the 45-day holding rule applies to all shares with franking credits attached, regardless of the value of total franking credit entitlements.
In other words, an SMSF must adhere to the 45-day holding rule regardless of how small the franking credits amounts, if the SMSF wishes to take advantage of the franking credit. The SMSF trustees must hold a company’s shares for at least 45 days plus also the day of purchase and the day of sale, for the SMSF to be entitled to franking credits.
Warning: Note that if an SMSF trustee partakes in dividend washing, then all of the franking credits will not be available (for an explanation of dividend washing, and information on the dividend washing integrity rule, see this ATO link).
Note: At the risk of repeating earlier comments, the 45-day holding rule applies to SMSFs regardless of the amount of franking credits. In contrast, the 45-day holding rule does not apply to individuals whose total franking credits entitlement for a financial year is below $5,000.
Explainer: Franking credits from dividends can eliminate or reduce the tax you have to pay on your SMSF’s earnings, including any capital gains your fund may receive. If your fund receives any franked dividends on Australian shares, then the 30% prepaid tax on the dividends can be offset against any tax payable by the fund. Note that smaller companies are now subject to 27.5% income tax (if aggregated annual turnover is less than $25 million). The pre-paid tax is known as franking credits, and they work as a tax credit or offset. For a SMSF to be eligible for franking credits, the SMSF trustee must hold the share for at least 45 days.
Tax alert! The Australian Labor Party has announced that if it wins the 2019 Federal Election, it will ban cash tax refunds for excess franking credits. For more information on this proposed policy, see SuperGuide articles ALP’s franking credits policy targets shareholders with low taxable incomes and Excess franking credits: Shorten shortchanges millions of retirees.
For more information about franked dividends, see the following SuperGuide articles:
- Franked dividends and franking credits: How do they work?
- SMSF investment: Companies that pay fully franked dividends
- Super for beginners, part 17: Four must-knows about super’s tax rules
- Guest contributor: Franked dividends are not a tax concession
For more information about the ALP’s proposal to ban cash refunds of excess franking credits, see the following SuperGuide articles: