If you’re running a self-managed super fund (SMSF), you’ve probably heard of franking credits. But many trustees don’t realise just how valuable these credits can be, especially when it comes to their SMSF tax return and long-term investment performance.
Disclaimer: This is general information only and not financial advice. Please speak to a licensed adviser before making any decisions.
Franking credits, also known as imputation credits, are a tax feature unique to Australia. They allow investors, including SMSFs, to claim back some or all of the tax already paid by Australian companies on the profits distributed as dividends. For SMSF trustees, understanding and using franking credits correctly can result in thousands of dollars in refunds each year, particularly once your fund moves into the pension phase.
This article explores what franking credits are, why they matter for your SMSF, and how they can be managed to maximise returns through your SMSF tax return. It also explains how a good SMSF accountant can help you make the most of this powerful tax benefit.
What Are Franking Credits?
When Australian companies earn profits, they pay company tax at the corporate rate, generally 30%. If they choose to distribute some of those profits to shareholders as dividends, they can attach a franking credit to those dividends. This credit represents the tax already paid by the company.
These franking credits aren’t just a line item on a dividend statement; they’re effectively a tax credit for the investor. If your SMSF receives a fully franked dividend, it also receives a credit for the tax already paid by the company, which it can then apply to reduce its own tax bill or get back as a refund from the ATO.
The result is that franking credits can significantly reduce the amount of tax your SMSF pays each year. In some cases, particularly for funds in the pension phase, they can even generate a large cash refund.
How Franking Credits Work in Practice
Let’s break it down with an example.
If your SMSF holds $1 million in fully franked Australian shares, generating a 5% dividend return. That means your fund receives $50,000 in franked dividends for the year.
These dividends come with approximately $21,429 in franking credits attached. So, the total taxable income from these investments is $71,429.
Now, here’s how this income is taxed depending on your fund’s status and structure:
1. SMSF in Accumulation Phase (15% tax rate)
- Tax payable on $71,429 = $10,714
- Franking credits received = $21,429
- Net result: Your SMSF receives a refund of $10,714 through its SMSF tax return
2. SMSF in Pension Phase (0% tax rate)
- No tax is payable
- Franking credits = $21,429
- Net result: Your SMSF receives the full $21,429 as a cash refund from the ATO
3. Individual at Average Marginal Tax Rate (32%)
- Tax payable on $71,429 = $22,857
- Franking credits = $21,429
- Net result: The individual still owes $1,428 in tax
As this example shows, SMSFs. especially in the pension phase, are in a structurally better position to benefit from franking credits compared to individuals.
Why It Matters: Compounding Gains Over Time
While a $10,000 or $21,000 refund might not seem like a game-changer on its own, the long-term benefits are substantial. According to the Australian Financial Review, a strategy based on fully franked dividends could result in an extra $665,000 in retirement savings over 10 years.
That’s purely from the ongoing impact of franking credit refunds, especially when they’re reinvested into the SMSF. And unlike other strategies, this one doesn’t involve aggressive risk-taking or speculative assets; it’s a product of tax efficiency and consistent income through Australian shares.
How to Qualify for Franking Credits
To access franking credits, your SMSF must meet some basic conditions:
- The 45-day holding rule: Your fund must hold the shares “at risk” for at least 45 days (excluding the purchase and sale dates) to be eligible to claim franking credits.
- Proper reporting: Your SMSF tax return must correctly report franked dividend income and the associated franking credits.
- Correct investment structure: Not all dividend-paying shares are franked, and not all franking credits are equal. The choice of investments matters.
This is where working with a specialist SMSF accountant can make a big difference. At autoSMSF, we ensure your fund meets the eligibility criteria and that all franking credits are correctly claimed in your SMSF return. For many trustees, this means consistent annual refunds that go straight back into the fund, helping grow wealth over time.
What It Means for Your SMSF Setup and Strategy
If you’re just getting started with your SMSF setup, or reviewing your current investment strategy, franking credits should be part of the conversation. Australian companies that pay fully franked dividends, particularly in sectors like financials, utilities, and industrials, can form the foundation of a solid income-generating portfolio.
Combined with the right tax structure, these SMSF investments can produce income that’s not only stable but also tax-effective.
It’s important to remember that franking credits aren’t guaranteed; they depend on company profits, government tax policy, and how the companies choose to structure their dividends. However, when they’re available, SMSFs are in one of the best positions to benefit.
Why Work With an SMSF Specialist?
Understanding the tax treatment of franking credits is one thing. Making sure you claim them correctly and use them to your fund’s advantage is another.
This is where the right accountant makes all the difference. A SMSF accountant doesn’t just lodge your SMSF tax return; they review your fund’s income sources, track holding periods, ensure correct allocation between accumulation and pension accounts, and help you take advantage of every available credit.
At autoSMSF, we don’t generalise. We specialise in SMSFs, and along with your financial adviser, we know how to build strategies around what works for super, like franking credits.
Finally
Franking credits are one of those quiet advantages in the Australian superannuation system that can add real, measurable value over time. Whether your SMSF is still growing in the accumulation phase or you’re drawing a pension, these credits can reduce your tax and increase your fund’s income.
When structured correctly, franking credits don’t just improve annual returns; they can create a compounding effect that lifts your retirement savings significantly. But it all comes down to understanding the rules, investing wisely, and lodging an accurate and optimised SMSF tax return each year.
If you’re not sure whether your SMSF is making the most of franking credits, speak to a specialist. A good SMSF accountant and financial adviser will help you identify opportunities, ensure compliance, and unlock more value from your investments.
Want to make sure your fund is getting everything it’s entitled to? Let’s talk. We’re here to make your SMSF return work harder for your future.
Disclaimer: This is general information only and not financial advice. Please speak to a licensed adviser before making any decisions. autoSMSF is not a licensed financial adviser or an authorised representative of one. We are registered tax agents and can assist with SMSF accounting, taxation, and financial reporting.
