What is the 45 day dividend rule?
The 45-Day Rule requires resident taxpayers to hold shares at risk for at least 45 days (90 days for preference shares, not including the day of acquisition or disposal) in order to be entitled to Franking Credits.
The Last-in First-out (LIFO) Rule
This means that when a taxpayer sells a security that is included in the group within the relevant qualification period, the date that the security was acquired is taken to be the date on which the most recently acquired securities in the group were acquired.
Holding period rule
To be eligible for a tax offset for the franking credit you are required to hold the shares 'at risk' for at least 45 days (90 days for preference shares and not counting the day of acquisition or disposal). The holding period rule only needs to be satisfied once for each purchase of shares.
The provisions of income tax on dividend stripping are applicable when an investor, who buys securities within the 3 months prior to the record date and sells such securities, within 3 months after such date in case of shares and within 9 months in case of units.
Meeting the minimum holding period is the primary requirement for dividends to be designated as qualified. For common stock, the holding must exceed 60 days throughout the 120-day period, which begins 60 days before the ex-dividend date.
Fully franked dividends – When the corporate tax rate of 30% has been applied to 100% of the dividend. Partially franked dividends – When the 30% corporate tax rate has been applied to a portion of the dividend. Unfranked dividends – When no tax has been deducted from the dividend.
To calculate a grossed-up fully-franked dividend you must divide the dividend yield by 70 and multiply by 100. For example, if a company declares a dividend of $100 fully fully franked, the grossed-up dividend is $142.85, including franking credits of $42.85.
The primary qualification period begins the day after the shares are acquired, and ends 45 days after the ex-dividend date. If a shareholder purchases substantially identical shares over a period, the holding period rule applies a 'last in first out' method to establish which shares satisfy the holding period rule.
An individual claiming short-term capital loss from the sale of a share must have purchased or acquired share units within 3 months before the record date. Such a person sells or transfers the securities within 3 months post the record date, 9 months in the case of mutual fund units.
In cases where a shareholder's personal tax rate is lower than the corporate tax rate, franking credits can lead to significant tax savings or even tax refunds, increasing the shareholder's after-tax income. Franking credits can be particularly beneficial for retirees with lower taxable incomes.
What is the 60 day dividend rule?
A dividend is considered qualified if the shareholder has held a stock for more than 60 days in the 121-day period that began 60 days before the ex-dividend date.2 The ex-dividend date is one market day before the dividend's record date.
If the dividend is 25% or more of the stock value, special rules apply to the determination of the ex-dividend date. In these cases, the ex-dividend date will be deferred until one business day after the dividend is paid.
Rule 3 of Dividend Rules prescribes the conditions to be complied with for declaring dividend out of reserves. A pertinent question here is – whether a company can declare dividend out of 100% of the amount that has been transferred to General Reserve.
There's no limit, and no set amount – you might even pay your shareholders different dividend amounts. Dividends are paid from a company's profits, so payments might fluctuate depending on how much profit is available. If the company doesn't have any retained profit, it can't make dividend payments.
There are no rules about how frequently dividends can be paid, but most businesses distribute them quarterly or every six months after working out how much the company can afford to pay.
For example, say I need to earn $50,000 a year to live comfortably and my average dividend yield is 5%. So, I would need to own $50,000 / 0.05 = $1 million worth of shares to meet my income needs.
You may be able to avoid all income taxes on dividends if your income is low enough to qualify for zero capital gains if you invest in a Roth retirement account or buy dividend stocks in a tax-advantaged education account.
Dividends are taxable regardless of whether you take them in cash or reinvest them in the mutual fund that pays them out. You incur the tax liability in the year in which the dividends are reinvested.
Your “qualified” dividends may be taxed at 0% if your taxable income falls below $44,625 (if single or Married Filing Separately), $59,750 (if Head of Household), or $89,250 (if (Married Filing Jointly or qualifying widow/widower) (tax year 2023). Above those thresholds, the qualified dividend tax rate is 15%.
| Tax Band | 2023/24 and 2024/5 Tax Years | Tax Rate |
|---|---|---|
| Basic | £0 – £37,700 | 8.75% |
| Higher | £37,701 – £125,140 | 33.75% |
| Additional | £125,140 + | 39.35% |
What is the formula for dividend pay out?
To calculate the dividend payout ratio, the formula divides the dividend amount distributed in the period by the net income in the same period. For example, if a company issued $20 million in dividends in the current period with $100 million in net income, the payout ratio would be 20%.
Mutual funds
For certain preferred stock, the security must be held for 91 days out of the 181-day period, beginning 90 days before the ex-dividend date. The amount received by the fund from that dividend-generating security must have been subsequently distributed to you.
Another important note to consider: as long as you purchase a stock prior to the ex-dividend date, you can then sell the stock any time on or after the ex-dividend date and still receive the dividend. A common misconception is that investors need to hold the stock through the record date or pay date.
Regardless, if you'd like to sell your shares and still get the dividend, hold onto them until the Ex-Dividend Date. Sell on or after the Ex-Dividend Date and you'll still receive the dividend.
The types of dividends a company pays out depending on the types of securities they offer. Common types include ordinary (cash) dividends, stock/share, property, and liquidating/special dividends.
