Franking credits – how do they benefit a SMSF?
Self Managed Super Funds (SMSFs) can benefit greatly from equity investments that contain franking credits by altering the fund’s tax payable amount – particularly during the pension phase.
The following is an example of a SMSF which is 40% accumulation and 60% pension.
Share holding |
Dividend |
Franking Credit |
Taxable Income |
ABC shares |
$5,100 |
$2,600 |
$7,700 |
JBlog Pty Ltd shares |
$2,200 |
$1,050 |
$3,250 |
XYZ shares |
$3,400 |
$1,300 |
$4,700 |
Interest on cash |
|
|
$5,000 |
Total |
$10,700 |
$4,950 |
$20,650 |
|
|
|
|
Amounts to accumulation phase |
|
$1,980 |
$8,260 |
Amounts to pension phase |
|
$2,970 |
$12,390 |
Tax amount on taxable income (15%) |
|
|
$1,239 |
|
|
|
|
Less franking credit |
|
|
($4,950) |
|
|
|
|
Excess franking credit |
|
|
$3,711 |
Pension income from complying super funds is exempt from paying income tax. Therefore, the assessable income tax is based only on the income derived from the accumulation portion of the dividend, although the franking credits from both pension and accumulation can be applied to reduce the tax liability.
In this example, the portion of the franking credits attributable to the pension account was contributed to pay the tax on earnings by the fund amounts in the accumulation phase.
The excess franking credits are then applied to the pension account, plus the difference between the excess franking credit and the franking credit attributable to the pension, ie:
3,711 + (4,950 – 3,711) = 4,950
There are two points to be aware of with this kind of arrangement. They are:
- The SMSF’s trust deed must provide for the transfer of the franking credits in this way.
- When the SMSF is in an accumulation and pension phase simultaneously, the franking credits must be used in a balanced manner due to the accumulation account having access to the total amount of the franking credits to pay the income tax.
The SMSF achieves its best advantage when in the pension phase because of its 0% tax status. But with prudent portfolio planning and the appropriate mix of assets, superannuation funds, regardless of whether they are in the accumulation or pension phases, can realise significant benefits from the use of franked investments.
Contact us on 02 9318 6400 or email fred.tortora@surrypartners.com.au to find out how franking can work for your SMSF.
Sources:
www.smsfessentials.com.au The benefits of franking credits in an SMSF (Graeme Colley 26 Feb 2013)
www.thesmsfreview.com.au The value of imputation credits in a SMSF (Copyright 2010)
www.ato.gov.au Self-managed super funds and tax exemptions of pension assets (25 Feb 2010)