Private ruling: Claiming double franking credits for shares
Published: July 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: Quarter starting July 2013

Ruling: Q1: Are you entitled to claim double franking credits for shares purchased by you? | A1: No

Relevant facts and circumstances: Date Transaction August 2013 Purchased shares (parcel A) October 2013 Announced final dividend November 2013 Purchased additional shares (parcel B) November 2013 Shares trading ex-dividend November 2013 Sold one parcel of shares ex-dividend December 2013 Received dividend for both share parcels You advised that you held the original shares for more than 45 days before selling them and held the second parcel of shares purchased for more than 45 days. Therefore, you believe you are entitled to the franking credit for both parcels of shares and TD 2014/D1 Income tax: can section 177EA of the Income Tax Assessment Act 1936 apply to a 'dividend washing' scheme of the type described in this Taxation Determination ? does not apply to your circumstances. You purchased the second parcel of shares with a view to sell the first parcel after the ex-dividend date as you expected to realise a capital gain from the first parcel. You are carrying a capital loss from prior years and intend to use this loss to offset any capital gains made on this trade. You calculated your capital gain using the first in, first out principle. You have received around $10,000 in franking credits this financial year from other share holdings.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 177D | Income Tax Assessment Act 1936 Sections 160APHI | Income Tax Assessment Act 1997 Subdivision 207-A

Reasons for decision: Summary: The general rule in relation to the receipt of franked dividends as set out in Subdivision 207-A of the Income Tax Assessment Act 1997 (ITAA 1997) is that for the income year in which the distribution is made, the recipient of a franked distribution: • includes in their assessable income the amount of the franking credit on the distribution. This is in addition to any other amount included in the recipient's assessable income in relation to the distribution itself (i.e. in addition to the amount of the dividend itself under section 44 of the ITAA 1936, and • is entitled to a tax offset equal to the franking credit. Under paragraph 207-145(1)(a), (ITAA 1997) if an entity to whom a franked distribution is made is 'not a qualified person in relation to the distribution for the purposes of Division 1A of former Part IIIAA of the Income Tax Assessment Act 1936 (ITAA 1936)...' it is not entitled to gross up its income for the franking credit received, nor claim a tax offset equal to the franking credit. To be a qualified person for this purpose, the entity must satisfy the holding period rule for the shares in question. The holding period rule requires you to continuously hold shares 'at risk' for at least 45 days (90 days for certain preference shares) to be eligible for the franking tax offset. The general effect of the holding period rule is that even if a dividend is accompanied by a dividend statement advising that there is a franking credit attached to the dividend, you are not entitled to claim the franking credit. For the purpose of the holding period rule, if a shareholder purchases substantially identical shares (parcel A shares purchased first and parcel B shares) in a company over a period of time, the holding period rule uses the 'last in first out' method to identify which shares will pass the holding period rule. Therefore if a taxpayer owned both parcels of shares at the same time and then disposed of parcel A, the application of the 'last-in first out' rule in former section 160APHI (ITAA 1936) would mean that the taxpayer would not satisfy the qualified persons rule for parcel A, as they would be taken for the purpose of those rules to have actually disposed of parcel B. | Detailed Reasoning - Publication: 'You and your shares 2013' - EXAMPLE 7: Substantially identical shares: Jessica has held 10,000 shares in Mimosa Pty Ltd for 12 months. She purchased an additional 4,000 shares in Mimosa Pty Ltd 10 days before they became ex-dividend (the day after the last day on which acquisition of the shares will entitle you to receive a dividend) and then sold 4,000 shares 20 days after Mimosa Pty Ltd shares became ex-dividend. Her total franking credit entitlement for the income year was more than $5,000. The shares she sold are deemed to have been held for less than 45 days, based on the last in first out method. Jessica would not be entitled to the franking credits on the 4,000 shares sold. In your case, you purchased shares (parcel A) in August 2013 and another parcel of shares (parcel B) in November 2013. You then sold a parcel of shares in November 2013. Due to the qualified person and holding period rules, you are taken to have sold the second parcel of shares (parcel B) in November 2013 and as such you did not pass the holding period of 45 days. In your 2013-14 tax return you will need to include the full franked dividends but may only claim a franking credit offset for one parcel of shares.