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

FAQs

What is the 45 day rule for dividend stripping? ›

The 45 day rule (sometimes called dividend stripping) requires shareholders to have held the shares 'at risk' for at least 45 days (plus the purchase day and sale day) in order to be eligible to claim franking credits in their tax returns.

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.

For an investor, dividend stripping provides dividend income, and a capital loss when the shares fall in value (in normal circ*mstances) on going ex-dividend. This may be profitable if income is greater than the loss, or if the tax treatment of the two gives an advantage.

The provisions in the Income Tax Act regarding dividend stripping are designed to curb the practice of using short-term transactions around dividend dates to manipulate tax liabilities. The law aims to ensure that losses from such transactions cannot be used to offset gains for tax purposes.

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.

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.

Companies use an imputation credit account (ICA) to keep track of: how much tax they've paid. how much tax they've passed on to shareholders or had refunded to them.

A franking credit is your share of tax paid by a company on the profits from which your dividends or distributions are paid. A franking credit is also known as an: imputation credit.

A company can only carry forward imputation credits where at least 66% continuity of shareholding is maintained. The policy behind this is to limit the availability of imptation credits to the shareholders who bore the tax liability that gave rise to the credit.

Depending on how much money you have in those stocks or funds, their growth over time, and how much you reinvest your dividends, you could be generating enough money to live off of each year, without having any other retirement plan.

What is the dividend stripping strategy? ›

Dividend stripping involves buying stocks before a dividend is declared and selling them post-dividend. Aimed at securing dividend income and tax advantages, this strategy capitalizes on the post-dividend drop in stock prices.

If your goal is long-term portfolio growth, dividend reinvestment makes sense: Reinvested dividends help grow your investment. If you aim to generate an income stream or fund an immediate financial need, you're better off taking cash dividends. Your investment style.

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.

This means that you must continuously own shares 'at risk' for at least 45 days (90 days for certain preference shares) not counting the day of acquisition or disposal, to be eligible for any franking tax offset.

A dividend is considered qualified if the shareholder has held a stock for more than 60 days in the 121-day period that began 60 days before the ex-dividend date. 2 The ex-dividend date is one market day before the dividend's record date.

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. If the company doesn't have any retained profit, it can't make dividend payments.

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.

It may be that a founder is no longer active on a day-to-day basis with the company but doesn't want to relinquish their stake in the company completely by selling their shares. In this case the founder shareholder may opt to waive their right to a dividend when profits are distributed amongst shareholders.

The stop-loss rules in subsections 112(3) to (3.32) of the Act apply to share dispositions and may reduce the loss on the sale of a share by the amount of tax-free dividends received on the share.