The Imputation or Franking Credits in SMSF

13 Nov The Imputation or Franking Credits in SMSF

Imputation credits or Franking Credits are a type of tax credit that allows Australian Companies to pass on tax paid at the company level to shareholders.  Franking credits can be used to reduce income tax paid on dividends or potentially be received as a tax refund as a benefit.

Imputation credits can be claimed back in an SMSF, which will either reduce the SMSF tax liability or receive a refund from the ATO. Imputation credits are the same for an SMSF as for an individual.

This means that the dividend received is “grossed up” by the amount of imputation credit to achieve a grossed- up dividend and the tax is assessed at 15% on this amount. The fund is entitled to a tax offset for the imputation credit.

Let’s take this for example for a total dividend of $100:

• SMSF will receive $70 cash and $30 imputation credits. Tax is at 15% on the $100 income ($15) and set off the $30 imputation credit against this tax payable. SMSF will receive $15 as refund from ATO.

Imputation credits from fully franked dividends are 30% while the benefit of imputation credits in an SMSF is a tax rate of 15%.  This implies that the imputation credit easily accounts for the tax payable on the dividend received, and reduces the SMSF tax liability.

Income tax payable on SMSF can be reduced when imputation credit is used, or ATO will refund the credits if it exceeds the total tax bill.

When an SMSF receives a fully franked dividend, the franking credit will not only offset tax payable on the dividend itself, it will either offset tax payable on the SMSF’s other income (including concessional contributions) or be refunded by the ATO. This what makes imputation credit powerful as the the tax paid by a SMSF is 15% in the accumulation phase and 0% in the pension phase.

An SMSF is only entitled for franking credits if it holds the company shares for at least 45 days which includes the day of purchase and day of disposal. This applies to SMSFs regardless of the amount of franking credits. The $5000 ceiling exemption applied to individuals does not apply to SMSF as it is not a natural person. For individuals, the 45-day rule does not apply whose total franking credit entitlement for a financial year is below $5000.

Reference:

https://www.superannuationwarehouse.com.au/information/imputation-credits-in-a-smsf/