Accountants and advisers often promote franking credits as a “gift from the government” which reduce the amount of tax payable by the fund, according to SPAA’s director for technical and professional standards Graeme Colley.
“Although this may be the outcome, it couldn’t be further from the truth, as franking credits are really a timing issue in relation to the tax to be 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.”
In addition, Mr Colley said trustees often don’t understand that their eligibility to claim franking credits against the tax payable by their SMSF has some limitations.
“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,” Mr Colley said.
“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.”