Franking Credits Denied: The 45-Day Holding Rule and Newly Incorporated Corporate Beneficiaries

ATO Compliance Focus: Franked Dividends to Corporate Beneficiaries

The ATO is targeting the ‘45 day holding rule’. The 45 day holding rule is an anti-avoidance rule designed to prevent ‘franking credit trading’ by taxpayers claiming franking credits on dividends without having genuine economic ownership of the shares.

The ATO flagged the 45 day holding rule as an area of focus for Private Wealth in 2024-25 and have recently been raising the issue in reviews and audits of taxpayers.

Under the 45 day holding rule, to claim franking credits attached to a dividend, a taxpayer must:

1. hold the shares in the company ‘at risk’;  
2. for a period of:
   
   • 45 days for non-preference shares;
   • and 90 days for preference shares,

beginning on the day the taxpayer acquired the shares, and not including the day the taxpayer acquired or disposed of the shares.

The ATO is focused on situations where corporate beneficiaries of discretionary family trusts stream franked dividends to a newly incorporated corporate beneficiary.  

The ATO’s position is that if a trust distributes a dividend to a corporate beneficiary that was incorporated after the day on which the dividend was declared, a corporate beneficiary cannot satisfy the 45 day holding rule because the corporate beneficiary did not hold the shares ‘at risk’. This is despite the fact that the discretionary family trust has held its shares in the relevant company for years.

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Tax Consequences for Incorrect Franked Dividend Distributions

Usually, if a corporate beneficiary receives a franked distribution and the associated franking credits from a trust, provided the dividend paying company and corporate beneficiary have the same corporate tax rate, after applying the franking credit tax offset, no further tax would be payable by the corporate beneficiary.

However, if the 45 day holding rule is not satisfied, the corporate beneficiary cannot apply the franking credit offset to offset the tax payable on the dividend income (the corporate beneficiary’s assessable income will also not be grossed up to include the franking credits).

In effect, the distribution is treated as unfranked and the corporate beneficiary will be assessed on the dividend income – so the benefit of the franking credit is lost.

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Year-End Actions for Trust Distributions to Corporate Beneficiaries

The ATO’s position on the 45 day holding rule is currently untested by Tribunals or Courts, and the guidance available to taxpayers is limited.

However, to avoid potentially adverse tax outcome as a result of the ATO’s position, taxpayers intending to make franked distributions with the associated franking credits to corporate beneficiaries through trusts should ensure that the corporate beneficiary was incorporated at least 45 days before the dividends were declared.

If you want to discuss the application of the 45 day holding rule to your situation or any other aspect of year-end trust distributions, please contact Andrew Henshaw or Tyson Bateman.

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This article in no way constitutes legal advice. It is general in nature and is the opinion of the author only. You should seek legal advice tailored to your individual circumstances before acting on anything related to this article.

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