Franking Credits – Their Value in Self Managed Super

Franked income, such as franked dividends and in some cases trust distributions, can offer significant advantages when managing your self managed super fund (SMSF)s tax liability.  It is another example of the benefit of taking control of your super with an SMSF.

Australian companies and trusts give franking or tax credits, also known as imputation credits, for Australian income tax they have paid. These are passed on to investors when the company or trust pays franked dividends or distributions or income. Since the Australian company tax rate is 30%, the tax credit attached to most fully franked dividends is 30%.

Once in an investor’s hands, the ‘tax credits’ are used to reduce the amount of income tax payable by the investor, or if the credits exceed their total tax bill, the credits will be refunded to the investor by the Australian Taxation Office (ATO) on lodgement of their tax return.

In an SMSF, franked income is extremely powerful because the maximum rate of tax paid by a self managed fund on investment income is 15% when in the accumulation phase and 0% when in pension phase. Therefore, when an SMSF receives a fully franked dividend, the franking credit will not only offset tax payable on the dividend itself, it will either offset tax payable on the SMSF’s other income (including concessional contributions) or may be refunded by the ATO.

For example: SMSF receives:

$560        Dividend received in cash

$240        Franking credit with distribution

$800        Total “Distribution”

$500        Interest Income

$1300      Total Taxable Income

$195        Tax payable on Income, at 15% in SMSF

$240        Less these Franking credits

-$45         Net refund from ATO (240credit-195due)

Here the Franking Credit more than covered the tax due, resulting in a refund

If Pesion phase was running in the SMSF, the $195 would not be due at all, and the FULL $240 would be returned to the fund.

The main rule dictating whether your SMSF is entitled to use the franking credits it receives is known as the 45 day holding rule.

This rule generally requires your SMSF to hold an investment for at least 45 days (not counting the day of acquisition or disposal) to be eligible for a tax offset or refund of the franking credit.

However the benefits of franking credits should not be the driver of Investment decisions, other factors must also be considered.

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About SuperBenefitnews

Self-Managed Superannuation Service Providers in Australia. SuperBenefit provides a wholistic SMSF assistance, education and administration service continuum - 1. “assistance” is help of whatsoever nature where our overall SMSF experience and knowledge enables us to provide assistance/help without any legal (or “license”) limitations. 2. “education” involves providing knowledge through teaching, coaching and mentoring about all matters SMSF, including (but not limited to) investment issues such as equities and property, 3. “administration” encompasses all admin aspects of legally required SMSF trustee and member record keeping including (but not limited to) audit and ATO matters. In keeping with our key point that SuperBenefit does not provide Financial Advice, where issues arise from 1, 2, and/or 3 above Indicate a need for a legally authorized provider (such as a Financial Adviser) and the client does not have their own service provider, the client can utilize SuperBenefit’s ‘Connect Assist’ … SuperBenefit, in itself, does not provide Financial Advice, but it does provide the wherewithal for great SMSF service. WE do not provide Financial Advice or any other service that requires a legally authorized provider. However, where such advice or service is required we have our ‘Connect Assist’, a SuperBenefit resource we use to connect clients to a Licensed Advisor or other legally authorised service provider. Call us 0407 361 596, no obligation FREE Connection call to see how we can help you!
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