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Franking credits are a valuable benefit for Australian investors. They are tax offsets attached to dividends, ensuring that company profits aren’t taxed twice, once at the company level and again at the shareholder level.

For many investors, particularly retirees and those with self-managed super funds (SMSFs), franking credits can significantly boost after-tax returns. However, the Australian Taxation Office (ATO) requires investors to meet certain conditions before claiming these credits. Two key rules apply: the 45-day holding period rule and the small shareholder exemption.

What is the 45-Day Holding Period Rule?

The 45-day holding period rule is a tax integrity measure designed to ensure that franking credits go to genuine investors rather than short-term traders. To claim franking credits on a dividend, shareholders must meet two key conditions:

  1. Holding Time Requirement
    • Ordinary shares must be held for at least 45 continuous days (excluding the purchase and sale dates).
      Eligible preference shares require a minimum holding period of 90 days.
    • This means the ownership period must include at least 45 days during which the shares are held at risk, around the dividend’s ex-dividend date.
  2. At-Risk Requirement
    • The shares must be held “at risk,” meaning your exposure to price movements must not be materially reduced through hedging or similar arrangements.
    • If you use options, contracts for difference (CFDs), or other strategies that offset the price risk, you may not satisfy the test.

In addition to the holding-period rule, the ATO also applies:

  • The related-payments rule, which prevents investors from passing on the benefit of franked dividends to another party.
  • The qualified person test, which ensures only those genuinely entitled to the benefit of franking credits can claim them.

The franking credit 45-day rule was introduced to prevent dividend-stripping strategies, where investors briefly buy shares solely to capture dividends and franking credits before quickly selling them. By requiring a minimum holding period and genuine risk exposure, the rule ensures that franking credits reward longer-term investment rather than short-term speculation.

For example:

  • An investor buys shares on 1 June.
  • A dividend is declared on 10 June.
  • The shares are sold on 20 June.

Although this spans 20 days on the calendar, the purchase date (June 1) and the sale date (June 20) are excluded from the calculation. This leaves only 18 eligible days held (2–19 June), which is well below the 45-day requirement. As a result, the franking credits on that dividend cannot be claimed.

Why Long-Term ASX Investors Usually Meet the Rule Naturally

Most buy-and-hold shareholders meet the 45-day requirement without even trying. Because they hold shares for months or years, every parcel easily clears the threshold. Let’s look at some common scenarios:

Buy-and-Hold Portfolios

Investors who follow a buy-and-hold strategy typically keep their shares well beyond dividend dates, often for years at a time. Because every share parcel is held continually, each one comfortably passes the 45-day test. This reflects the original intent of franking credits: to support genuine investors rather than short-term “dividend stripping” strategies designed to chase credits without real ownership.

Dividend Reinvestment Plans (DRPs)

Under a DRP, dividends are used to purchase additional shares in the company, rather than being paid out in cash. Each new parcel of shares comes with its own holding period; however, because investors typically keep these reinvested shares indefinitely, the 45-day requirement is naturally met. Over time, this creates a compounding effect: more shares, more dividends, and more credits, all without breaching the rule.

Superannuation Investments

Super funds, whether personal SMSFs or large industry funds, are structured for long-term accumulation and retirement income. Shares bought within these funds are generally held for extended periods, often across multiple dividend cycles. Because of this, investors benefit from franking credits automatically. Even when members shift from the accumulation phase to the pension phase, the holdings themselves remain intact, continuing to satisfy the rule with ease.

Risks When Trading Around Dividend Dates

The 45-day rule is most relevant to investors who actively trade near dividend dates. Key risks include:

Failing to Hit 45 Days

If you buy too close to the ex-dividend date and sell soon after, you may not meet the 45-day test. Even missing by one day means losing the franking credits for that dividend. The ATO also applies parcel rules (last-in, first-out) to determine which shares are deemed sold, which can trip up frequent traders.

Share Price Drop

On the ex-dividend date, share prices typically fall by roughly the dividend amount. Without also collecting the franking credit (because the 45-day test wasn’t met), the after-tax return can be negative. Many “dividend-chasing” trades underperform because of this price drop.

Reduced Effective Yield

For an income-focused investor, missing a franking credit is a significant reduction in yield. Franking credits can add 20-30% to a dividend’s value, so losing them significantly lowers your after-tax income. Combined with a likely share-price dip, a quick dividend play can underperform even a fully taxable dividend of the same size.

The Small-Shareholder Exemption ($5,000 Rule)

The small-shareholder exemption provides relief for smaller investors. Under ATO rules, if your total franking credit entitlements for the year are $5,000 or less, you can ignore the 45-day holding period rule. In other words, small investors don’t have to count days to claim their credits under this cap.

Here’s what you need to know about this exemption:

Applies To Total Credits Per Person

The $5,000 test is applied per taxpayer, per year, not per share or per dividend. All franked dividends (whether direct or through a trust) are aggregated. If the combined franking credits you’re claiming for the year stay at $5,000 or under, you automatically qualify for the exemption.

Exemption Cutoff

Once you exceed $5,000 in credits for the year, the exemption no longer applies. From that point, every franked dividend must meet the 45-day rule. You can’t “cap” your claim at $5,000; if your credits go over the threshold, you lose the exemption entirely.

Individuals Only

This concession is only available to individual taxpayers. SMSFs, companies and other entities are not eligible. An SMSF with $4,000 in franking credits must meet the holding test, just as an SMSF with $40,000 does.

For example:

A retiree holding $50,000 in fully franked shares might generate roughly $3,000 in franking credits for the year. Since $3,000 is under the $5,000 limit, that investor is exempt and does not need to track holding days.

An SMSF with a $200,000 portfolio of franked shares could generate $10,000 of credits, which is well above the cap. That fund must satisfy the 45-day holding period rule on all dividends to claim the credits.

The Impact of the 45-Day Rule on Different Investment Strategies

The 45-day holding period rule does not affect all investors equally. Its impact depends heavily on your investment style, portfolio size, and trading frequency. Below is a breakdown of how the rule plays out across common strategies:

Buy-and-Hold Investors

Long-term investors are largely unaffected. By holding shares for months or years, the 45-day test is automatically met. For retirees or SMSFs focused on dividend stocks, franking credits accumulate with little effort, making this the simplest way to benefit consistently.

Active Traders

Frequent trading brings complexity. Each new purchase restarts the 45-day clock, requiring careful tracking. Selling even a day too early can mean losing franking credits. Active portfolios, therefore, need strict record-keeping and precise timing to stay compliant.

Dividend Chasers

Buying just before the ex-dividend date and selling right after rarely pays off. The share price typically drops by about the dividend amount, and without franking credits, these trades often underperform. The rule effectively shuts down short-term dividend-stripping strategies.

SMSFs and Larger Portfolios

SMSFs never qualify for the $5,000 exemption, and once annual franking credits exceed this amount, every dividend must meet the rule. Accurate tracking is critical, particularly for retirement funds where errors can trigger tax and audit issues. Trustees and advisers should have strong systems in place to monitor compliance.

Compliance & Record-Keeping Tips

Staying compliant with the 45-day holding period rule comes down to organisation. Here are some practical steps to help:
  1. Count Days Carefully
    • When you buy franked shares, record the purchase date.
    • Exclude both the purchase date and the sale date when calculating your 45 days.
    • Use a calendar, spreadsheet, or software tool to ensure you reach the full 45 trading days.
  2. Monitor Ex-Dividend Dates
    • Always check a company’s ex-dividend date before buying.
    • To be safe, buy well before the expiration date and hold for at least 45 trading days afterwards.
    • Avoid last-minute purchases if you plan to sell quickly, as they may not satisfy the rule.
  3. Keep Accurate Records
    • Retain broker trade confirmations and dividend statements.
    • Document purchase and sale dates, dividend payment details, and holding periods.
    • If using an online platform, download reports that summarise transactions and dividends received.
  4. Use Tools or Professional Advice
    • Portfolio-tracking software can automatically flag ex-dividend dates and calculate holding periods.
    • For active or complex portfolios, consult your accountant or financial adviser to ensure compliance and proper reporting.
  5. Refer to ATO Guidance
    The ATO’s resources provide detailed explanations and worked examples. Key points include:
    • The $5,000 small-shareholder exemption applies only if all franking credits for the year stay under this limit.
    • If credits exceed $5,000, every dividend must satisfy the 45-day rule.

Remember: being organised is the key. By tracking purchases, monitoring holding periods, and knowing whether the $5,000 exemption applies, you can claim franking credits confidently and avoid unpleasant surprises at tax time.

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Secure Your Future With Flagship Investments

Understanding the 45-day franking credit rule and the small-shareholder exemption is just one part of making smarter investment decisions.

You can also explore how franked dividends are calculated and how they count toward your personal income to build a complete picture of their tax impact.

At Flagship Investments, we provide shareholders with the benefits of a professionally managed, diversified investment portfolio. Our disciplined approach focuses on delivering sustainable returns, protecting income streams, and maximising the value of franking credits over the long term.

If you have any questions or would like assistance, please don’t hesitate to contact the Flagships Investments team today.