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Maximising super through franking credits

 
                       
          

SMSF members with an equity portfolio containing fully franked Australian shares may benefit from using franking credits to offset their fund's taxable income.

 

Franking credits are tax credits that are passed on to investors as a result of tax paid at company level on shares of Australian companies. Franking credits have the potential to reduce the tax payable by the investor or provide the investor with a tax refund if the credits exceed their total tax bill.

 

Where a company distributes fully franked dividends (and those dividends are included in the taxable income of the taxpayer) the taxpayer can claim a credit against their taxable income for the tax that has already been paid by the company from which the dividend was paid.

 

   

Franking credits from fully franked dividends incur a 30 per cent company tax rate. Where an SMSF benefits is through the income tax rate for super funds which is typically taxed at 15 per cent. The difference in tax rates can provide members with a significant excess to reduce the other tax payable by the fund or if none exist, obtain a refund.

 

SMSF members planning for their retirement in the accumulation phase can only receive a partial refund, as they are required to pay a maximum tax rate of 15 per cent on investment income earned by the fund. Investment income includes concessional contributions, income from other sources such as unfranked dividends, rental income from property and taxable capital gains.

There are additional benefits for those SMSF members in pension phase, as there is a zero tax rate for those over 60, which entitles members to a full refund for the franking credits received.

 

To be eligible for the franking credit offset, there is a 45 day holding rule which requires superannuation funds to remain invested in the shares for at least 45 days for fully paid ordinary shares and 90 days for some preference shares, excluding the purchase and sale days.

 

 

SMSF members might want to check how their eligibility will be affected if they are found to participate in a dividend washing scheme. The ATO has strict rules to discourage dividend washing arrangements. Dividend washing is the practice through which taxpayers seek to claim two sets of franking credits by selling shares held on the Australian Securities Exchange (ASX) and then effectively repurchasing the same parcel of shares on a special ASX trading market.

 

While investing in Australian shares can maximise the return on an investor's portfolio, SMSF members should be wary that investment in shares purely for franking credits can increase the risk and volatility of the SMSF and may not be suitable for some individuals.

 
 
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