Private groups are presently receiving questions from The Australian Taxation Office (Tax Office) which go along the following lines.
“Having regard to the qualified person rules contained in Division 1A of former Part IIIAA of the Income Tax Assessment Act 1936, please explain how the corporate beneficiary satisfies the holding period rule and the related payment rule to meet the definition of a qualified person (that is, how has the corporate beneficiary held the shares ‘at risk’ for at least 45 days), noting that the corporate beneficiary was incorporated on DD MM YYYY”.
What is the “45-day holding period rule”?
Under the tax law, a person must hold shares or an interest in shares at risk for at least 45 days to be eligible to use the franking credits which attach to the dividends they’ve received.
At face value, the rule is simple. Hold the shares for the required period and the franking credits are yours. But the devil is in the detail.
You’re first required to calculate the “primary qualification period”. The period commences the day after the day you acquire the shares and ends on the 45th day after the day the shares go ex-dividend. Once you calculate the “primary qualification period”, you are then required to calculate, and exclude, the number of days where you didn’t hold the shares at risk.
By way of simple example:
- Sally acquired shares in ABC Co on 1 January 2023;
- the shares in ABC Co went ex-dividend on 1 January 2024; and
- Sally held the shares at risk at all times.
In this scenario, the primary qualification period is 410 days, calculated:
- from 2 January 2023 (ie, the day after the day Sally acquired the shares),
- to 16 February 2024 (ie, the 45th day after the day the shares in ABC Co went ex-dividend).
Sally is therefore a qualified person because she held the shares in ABC Co at risk for 410 days, being more than 45 days. Sally gets her franking credits.
Whereas, let’s say Sally entered a put option that diminished her risk in the shares for 400 of the 410 days, then Sally wouldn’t be a qualified person because she only held the shares at risk for 10 days, being less than 45 days. Sally doesn’t get her franking credits.
For completeness, the “45-day holding period rule” may also be referred to simply as the “45-day rule” or the “holding period rule” in other publications. However, they are all referring to the same set of rules under the tax law. There is also a “90-day holding period rule” for preference shares, and other related rules such as the related-payments rule, which we do not cover in this article.
What is the Tax Office targeting for private groups and how does a newly incorporated company fit in?
Similar rules to those explained above apply to family trusts and corporate beneficiaries, sometimes called “bucket companies”. There are also rules that apply when a family trust election is in place.
The risk targeted by the Tax Office arises when a corporate beneficiary is incorporated after the family trust derives the dividend. The Tax Office’s view appears to be that the corporate beneficiary isn’t eligible to use the franking credits because it couldn’t have held the shares held by the family trust for the required 45-day period.
By way of simple example:
- the Sally Family Trust acquired shares in ABC Co on 1 January 2023;
- the shares in ABC Co went ex-dividend on 1 January 2024;
- the Sally Family Trust held the shares at risk at all times;
- on 10 June 2024, Sally Bucket Co is incorporated; and
- on 30 June 2024, the Sally Family Trust makes Sally Bucket Co entitled to the dividend from ABC Co with the attached franking credits.
In this scenario, although the Sally Family Trust is a qualified person, the Tax Office’s view appears to be that Sally Bucket Co can’t be a qualified person because it was incorporated after the shares in ABC Co went ex-dividend.
The result is financially devastating for clients. Franking credits are denied and additional tax, potentially double-tax or more, may become payable. Penalties and interest may also apply.
How can we help?
We are aware of a spate of reviews and audits commenced by the Tax Office during the 2025 financial year. We are also assisting clients in these circumstances to navigate these issues and respond to the Tax Office’s queries.
Please contact us to discuss your circumstances in more detail.
This article was written by Vincent Licciardi, Partner, Isabelle Smith, Senior Associate, and Aidan Del Socorro, Solicitor.
