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Understanding of franking credits poor

The way SMSF investors use and understand franking credits associated with Australian equities leaves a lot to be desired, according to a technical expert associated with the industry.

SMSF Professionals’ Association of Australia technical and professional standards director Graeme Colley noted the use of franking credits could be more complicated than expected in some situations.

“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 or where there is a franking credit trading scheme in place,” Colley said.

“Remember, too, that to be eligible for the franking credit offset shares must satisfy the holding period rule that requires the superannuation fund to retain the shares ‘at risk’ for at least 45 days, excluding the days of acquisition and sale, and for some preference shares for at least 90 days.

“An exemption to this rule applies to small shareholdings where the total franking credit entitlement is less than $5000.”

He said irrespective of specific circumstances where the use of franking credits could become complicated, the general understanding of franking credits was still relatively poor.

In reality, they were just a tax credit resulting from a timing difference in relation to when tax was paid, he said.

“In effect, the 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 said.

“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 recommended SMSF trustees seek specialist advice when looking to take advantage of franking credits due to their complex nature.

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