I am about to lodge my income tax return but heard that I may not be entitled to claim the imputation credits on my dividends as I bought and sold the shares during the 7 days around the ex-dividend date.  Could you please clarify if that is the case?

You might be able to claim the imputation credits but the key is the amount of dividends that you have received during the year.

Being able to claim imputation (or franking) credits against your income is an important trading strategy for most people.  Companies that pay fully franked dividends provide a better yield after-tax than those that pay unfranked dividends because you get a credit for the 30% income tax already paid. However the introduction of the“45 day holding period” rule in the late 1990s was designed to stop people trading around the dividend date, purely to get these tax-advantaged imputation credits.

I remember when this rule was first introduced.  I was a young options trader and it created pandemonium on the floor because traders and investors alike were unsure how to price it in when looking at the future income stream. 

The holding period rule states that you may not be eligible for the franking tax offset unless you continuously hold shares “at risk” for at least 45 days (or 90 days for preference shares) around, and including, the ex-dividend date.  However under the small shareholder exemption, this rule does not apply if your total franking credit entitlement is below $5,000 in a financial year.  This is roughly equivalent to receiving a fully franked dividend of $11,666 based on the current tax rate of 30% for companies. Hopefully that applies to you!

This article first appeared in the Sept/Oct 2011 issue of YTE Magazine www.YTEmagazine.com. Copyright Your Media Edge Pty Ltd 2011.