Last-in first-out method for the holding period requirement

Franking credit trading and franking offsets

Franking credit trading occurs when franking credits are diverted from the true economic owners of the membership interests to others with more use for the credits.

To be entitled to a franking offset, a shareholder must be a 'qualified person' in relation to a franked dividend. A shareholder is generally a qualified person if they satisfy the holding period requirement under the qualified person rule.

Working out which shares a shareholder holds

The last-in first-out (LIFO) method applies to determine which shares or interests in shares are subject to testing for the purposes of the holding period requirement. This will generally be when the shareholder bought and sold primary securities and certain related securities held in the same company during the relevant qualification period.

If a shareholder purchases substantially identical shares over a period, the holding period requirement applies with a ‘last-in first-out’ method to establish which shares are tested for the purposes of the requirement. The LIFO method prevents taxpayers from manipulating the period they held shares in a company at risk by buying new shares and selling other shares held in the company for a longer period.

Primary securities

The primary securities are the shares or interest in shares held by a taxpayer during the relevant qualification period that carry an entitlement to a particular franked dividend. Shares or an interest in shares bought after the ex-dividend date or that don't carry an entitlement to the dividend are not considered to be primary securities.

The related securities include all substantially identical shares or interests in shares that are held by connected entities during the relevant qualification period.

Grouping securities

The LIFO method groups together the primary securities and related securities you hold in a company. The holding period requirement applies to this group. Once the group is established, any shares in the group that you sell are taken to be sold on a last-in first-out basis.

When a taxpayer sells a share included in the group (of shares) during the relevant qualification period, the date when that share was acquired is taken to be the date of acquisition of the most recently acquired shares in the group.

If (after applying the LIFO method) the shares or interest in shares weren't held at risk for a continuous period of at least 45 days during the relevant qualification period, the taxpayer isn't a qualified person in relation to the franked dividend. They won't be entitled to the relevant franking credits.

The LIFO method prevents taxpayers from manipulating the period that they held shares in a company at risk by buying new shares and selling other shares held in the company for a longer period.

Securities to include in the group

The LIFO method requires that the primary securities in a company are grouped together with all related securities in the company. Once you have established this group, any sales of shares from the group are taken to be on a last-in first-out basis.

The related securities include all substantially identical shares or interests in shares that are held by connected entities during the relevant qualification period.

Substantially identical

'Substantially identical' is defined in broad terms. It includes securities that are fungible or economically equivalent to a share or an interest in a share. Any shares or interests in shares held by a connected entity that don't carry an entitlement to receive the particular franked dividend aren't considered to be substantially identical to the primary securities.

For example, the additional shares aren't primary securities or substantially identical shares to the shares that are entitled to receive the special dividend where both of the following apply – a shareholder:

• receives a franked, special dividend payment on shares held in a company, and
• acquires additional shares in the company that don't confer an entitlement to receive the special dividend payment.

Therefore, the additional shares are excluded from the group for considering the application of the LIFO method in respect of the special dividend.

There may be situations where a shareholder:

• participates in an off-market share buy-back conducted by a company by selling shares held in the company
• acquires additional shares in the company that don't confer an entitlement to participate in the buy-back, but for which the shareholder is entitled to receive an ordinary dividend
• is also eligible for the ordinary dividend on the shares that were subsequently bought back.

In these situations, for the ordinary dividend, the additional shares in the company – which the shareholder acquired before the ex-entitlement date for that dividend – are either:

• primary securities
• substantially identical shares to those held by the shareholder that were eligible for sale into the buy-back.

This is the case even though the shareholder was unable to sell the additional shares into the buy-back.

Therefore, in this example, the additional shares are included in the group to which the LIFO method applies for the ordinary dividend. Any disposal from this group, including by selling shares in the buy-back, is subject to the LIFO method.

The following example shows how to apply the LIFO method of a special dividend that is received on shares that a shareholder sold into an off-market share buy-back where the shareholder acquired additional shares.

Connected entities

Connected entities include:

• the taxpayer (including other members of a consolidated group)
• an associate of the taxpayer (where the associate is party to an arrangement with the taxpayer)
• if the taxpayer is a company, other companies in the same wholly owned group.

What not to include in the group

You should generally exclude any shares or interest in shares where the entity has elected to use the benchmark portfolio method for being a qualified person for applying the LIFO method.

This applies as long as you haven't bought or sold your shares or interest in shares to avoid applying the LIFO method. Generally a share that is subject to the benchmark portfolio method won't be part of the bundle of related securities. It wouldn't affect the application of the LIFO method.

The LIFO method also doesn't 'double count' disposals of securities. It doesn't apply:

• where the sale of the shares or interest in shares wouldn't satisfy the holding period requirement even if the shares weren't included in the group
• in a disposal of a security from one member of a wholly owned group to another member of the same wholly owned group.

Applying the last-in first-out method

You need to take a consistent approach in applying the LIFO method. This is when you have bought and sold primary and related securities before the ex-dividend date during the relevant qualification period.

For example, if you have a staggered acquisition of 40,000 shares and a staggered disposal of 8,000 shares before the ex-dividend date during the relevant qualification period, the group on the ex-dividend date will be 32,000 shares.

In these circumstances, there are a number of methods to determine when you acquired the shares that are part of the group held at the ex-dividend date. This includes some practices acceptable from a capital gains tax (CGT) perspective, such as first-in first-out (FIFO) and 'loss max'.

However, these methodologies aren't consistent with the LIFO method. The LIFO method is an integrity rule that stops taxpayers circumventing the holding period requirement of the qualified person rule. For this reason, you ought to apply the LIFO method consistently across your portfolio.

You should apply this method consistently to determine the respective purchase dates of shares or interests in shares that form part of your group at the ex-dividend date and for any sales of shares after the ex-dividend date.