Franking credits and your SMSF
You may have noticed significant media coverage recently regarding the Australian Labor Party’s proposed policy to stop SMSFs from receiving tax refunds for the franking credits they receive in conjunction with the dividends paid from Australian companies they own.
First of all, what are franking credits and how do they benefit SMSFs?
Under the Australian tax system companies pay 30 per cent tax on their profits. When these profits are then passed on to their shareholders in the form of dividends, the company also hands the shareholders a credit for the tax the company has already paid (the “franking credit”). The individual shareholder then pays tax on the profit they received from the company less the credit for the tax the company has already paid. The franking credit ensures that the company profits are taxed at a shareholder’s marginal tax rate.
