Dividend franking turns 30 in 2017. Despite this, many are unfamiliar with the benefits franking credits can bring, especially to SMSFs.
SMSF trustees who invest in Australian shares can benefit from franking credit refunds which can offset the fund’s expenses, such as tax payable. A franking credit, also known as an imputation credit, is the amount of tax paid by a company of the dividend to the SMSF.
Franking credits are particularly beneficial for SMSFs as the maximum tax rate for the fund is 15 per cent, while franking credits can be equal to 30 per cent of the gross dividend – leaving a significant excess to offset any tax payable on the other taxable income earned by the fund.
When the fund is in pension phase, there are even more benefits as the tax rate is reduced to zero per cent. If the franking credits are larger than the SMSFs tax liabilities, the fund will receive a refund for the excess credits.
A company will only distribute franking credits if an SMSF satisfies the holding period rule, where the fund retains the shares “at risk” for at least 45 days excluding the day the fund acquires or sells its shares. This is extended to at least 90 days for some preference shares.