Holding period and related payment: small shareholder exemption

Will an individual who holds shares or an interest in shares in respect of which franked dividends were paid during the relevant year of income, qualify for the small shareholder exemption under section 160APHT of the Income Tax Assessment Act 1936 (ITAA 1936) if the shares were not held at risk for the requisite 45 days?

Yes. Pursuant to subsection 160 APHT(1) of the ITAA 1936, where the total franking credits do not exceed $5,000, an individual will be entitled to the benefit of franking credits, • regardless of when the shares or interest in shares were acquired, or • whether or not they had been held at risk for the requisite period, provided neither the individual nor an associate has made, is under an obligation to make, or is likely to make a related payment in respect of a particular dividend or distribution.

The individual has 1000 DEF Ltd shares acquired on 12 July 1994. These shares became ex-dividend on 13 May 2002 paying a fully franked dividend of $0.70 per share on 25 May 2002. The total dividend received was $700 and the franking credit was $300.

The individual acquired 50 RST Ltd shares on 10 March 2002 and sold those shares on 8 April 2002. The shares became ex-dividend on 15 March 2002 paying a fully franked dividend of $7.00 per share on 12 April 2002. The total dividend was $350 and the franking credit was $150.

The individual is also a beneficiary of a non-fixed trust where there are no fixed entitlements to income or capital of the trust.

The trust was settled on 1 July 1994 and the individual has been a beneficiary since the trust was settled.

The individual was made presently entitled to income of the trust for the 2001-02 income year and is required to include, in their tax return, their share of the net income of the trust, being $2000. The trustee of the trust allocated franking credits of $1800 with this distribution.

The trustee acquired the shares resulting in franking credits attached to the distribution on the 10 May 1995 and 1 July 2001.

The trustee of the trust was a qualified person in relation to all the shares it acquired.

The trustee of the trust did not make a family trust election.

The individual or an associate of the individual did not make, is not under an obligation to make and is not likely to make a related payment in respect of any dividend or distribution received.

Section 160APHT of the ITAA 1936 refers to the small shareholder exemption. The small shareholder exemption treats a taxpayer that is an individual as a qualified person in relation to all dividends paid on shares that the taxpayer held or held an interest in during the relevant year of income, where the total of the associated franking rebates does not exceed $5000.

However, in accordance with subsection 160APHT(2) of the ITAA 1936 the individual will not be a qualified person in relation to a particular dividend where the individual, or an associate has made, is under an obligation to make, or is likely to make a related payment in respect of the dividend or distribution attributable to the dividend.

The facts reveal franking credits passing indirectly through a trust to the individual and franking credits attached to dividends on shares held directly by the taxpayer. There are no related payments made by the individual or an associate of the individual in relation to any of these dividends or distributions. Therefore, all the franking credits are taken into account in determining whether the small shareholder exemption applies to the individual in respect of the 2001-02 income year.

Therefore, in determining the taxpayer's entitlement to franking credits under section 160 APHT of the ITAA 1936, it would not be necessary to consider if the relevant shares or interests in shares were held at risk for the requisite period, whether the relevant family trust elections were made or whether the trustee of the trust in which the taxpayer held an interest is a qualified person.

The total franking rebates from all sources, direct and indirect would be $2,250 ($300 + $150 + $1,800). As these amounts do not exceed the $5,000 threshold for the 2001-02 income year, the individual is a qualified person in accordance with section 160 APHT of the ITAA 1936 in relation to all the dividends paid during that year regardless of when the shares or interests were acquired or whether or not they were held at risk.

Therefore, the taxpayer will be entitled to franking rebates of $2,250 in respect of the 2001-02 income year under section 160APHT of the ITAA 1936.