Issue
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?
Decision
Yes. Pursuant to subsection 160APHT(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 whether or not the shares or the relevant interest in shares had been held at risk for the requisite period of time, 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; and • where a franked dividend flows to a beneficiary via a trust on account of an interest in shares, the trustee of the trust is a qualified person in relation to the dividend.
Facts
The individual has 1000 DEF Ltd shares acquired on 12 July 1998. 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 1998 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 which included $1800 of franking credits.
The trustee acquired the shares resulting in franking credits attached to the distribution on 10 May 1999 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.
Reasons for Decision
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 as well as 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 above-mentioned 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 160APHT 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 or whether the relevant family trust elections were made. However, pursuant to subsection 160APHU(1) of the ITAA 1936, if a trustee of a trust is not a qualified person in relation to a dividend, then no beneficiary of the trust is a qualified person in relation to the dividend. Subsection 160APHU(1) makes it clear that this rule must be satisfied despite any other provision of Subdivision B of Division 1A of Part IIIAA of the ITAA 1936 (except for subsection 160APHH(6) of the ITAA 1936).
However, based upon the relevant facts, the trustee of the trust was a qualified person in relation to all of the abovementioned dividends paid on the shares. 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 160APHT of the ITAA 1936 in relation to all the dividends paid during that year.
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.