Franking credits: Not a gift for SMSFs

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SMSF trustees still don’t understand franking credits, and some advisers and accountants may be adding to the problem.

SPAA director, technical and professional standards, Graeme Colley, said: “There is a common misconception, which some advisers and accountants promote, that a franking credit is like a gift from the government that reduces the amount of tax payable by the fund.”

He says there are definitely advantages from franking credits for SMSFs, especially in the pension phase, but it’s not a simple issue.

It is often not appreciated by trustees that their eligibility to claim franking credits against the tax payable by their SMSF has some limitations, says Colley.

Franking credits are really a timing issue – tax paid by the company is potentially dividend income foregone by the shareholder, who later gets the opportunity to reclaim some of this tax via franking credits, he says.

“A franking credit alters the timing of paying tax payable by the SMSF. This occurs at the time the company pays income tax which may end up as a franking credit on dividends paid to the fund and included in the fund’s income.”

Colley says there are a few vital things for SMSF trustees to know when it comes to franking credits:

  • The entitlement to use the franking credit may not be available where:
    • The company paying the dividend is involved in a dividend streaming or stripping arrangement
    • There is a franking credit trading scheme in place
  • To be eligible for the franking credit offset, the super fund must retain the shares ‘at risk’ for at least 45 days, excluding the days of acquisition and sale
  • An exemption to this rule applies to small shareholdings where the total franking credit entitlement is less than $5,000