Do superannuation funds receive franking credits? It’s a question that many Australians have been asking, given the recent controversy surrounding the issue. If you’re not familiar with the term, franking credits basically refer to tax credits that are attached to dividends paid out by Australian companies. These credits represent the tax already paid by the company, and can be used to offset the tax owed by the individual or entity receiving the dividends. Many investors rely on franking credits to boost their income, but there has been debate over whether or not superannuation funds should be receiving them.
The complicated nature of franking credits means that the issue is not always easy to understand. For many Australians, superannuation funds are a key component of their retirement planning, and the question of whether or not these funds should be receiving franking credits has significant implications. Some argue that allowing super funds to receive these tax credits is unfair to other investors, while others believe that it is only fair to allow all investors to benefit from them. With so much debate and disagreement over the issue, it can be difficult for the average person to know what to think.
Despite the controversy, the fact remains that many superannuation funds do receive franking credits. Whether or not this is a problem that needs to be addressed is up for debate, but it is a question that is likely to continue to be asked for some time to come. With so much at stake for retirees and investors alike, it’s important to stay informed and understand the complexity of the issue. So, do superannuation funds receive franking credits? The answer is yes – but the implications of this fact are still a matter of debate.
Definition of Superannuation Funds
A superannuation fund is a financial vehicle that provides retirement benefits for its members. Essentially, it is a savings plan that helps individuals accumulate wealth for their retirement years, and it is a common investment option in Australia. The primary function of a superannuation fund is to provide a stream of income for its members once they retire.
Types of Superannuation Funds
- Industry Super Funds – managed by industry fund bodies that represent specific industries.
- Retail Super Funds – managed by banks or investment firms and are available to the general public.
- Self-Managed Super Funds (SMSFs) – controlled by the members themselves, typically with 1-4 members.
Investment Options for Superannuation Funds
Superannuation funds can invest in a variety of assets such as cash, fixed interest, property, and shares. The exact investment strategy for a superannuation fund will depend on the fund’s goals, objectives, and risk tolerance.
Shares may be a popular investment option as they provide the potential for long-term growth and can generate income in the form of dividends. This is where franking credits come into play.
Do Superannuation Funds Receive Franking Credits?
Yes, superannuation funds receive franking credits when they invest in Australian shares that pay dividends. Franking credits are a tax credit that is attached to a dividend payment, and they represent the tax that the company has already paid on the earnings that the dividend is paid from.
| Scenario | Amount |
|---|---|
| Gross Dividend | $7,142.86 |
| Franking Credit | $3,061.22 |
| Total Dividend Paid to SMSF | $10,204.08 |
When the super fund receives the dividend, they also receive the attached franking credits, which they can use to offset their tax bill. If the franking credits exceed the amount of tax the super fund owes, they may receive a refund of the excess credit amount.
Overall, franking credits can be an effective way for superannuation funds to reduce their tax liability, making them an important consideration for those investing in Australian shares.
Understanding Franking Credits
Franking credits, also known as imputation credits, are a type of tax credit that Australian companies pass on to their shareholders as part of the dividend-paying process. These credits are intended to eliminate the double taxation of company profits at the corporate and individual level.
- Companies pay corporate income tax on their profits at a rate of 30%.
- When the company distributes profits to shareholders as dividends, the dividends are subject to personal income tax for the shareholders.
- Franking credits offset the personal income tax liability for the shareholder by the amount of corporate tax paid by the company on those earnings.
- If a shareholder pays a higher tax rate than the corporate tax rate, they may be required to pay some additional tax after receiving the dividend.
For example, if a company earns $100 in profits and pays $30 in corporate tax, they would have $70 left to distribute to shareholders as a dividend. If the shareholder is in a tax bracket where they would normally pay $20 in tax on a $70 dividend, they would receive a franking credit for the $30 spent on corporate tax. This would lower their personal income tax liability to $10.
Some superannuation funds invest in Australian companies and therefore receive franking credits when those companies pay dividends. However, the treatment of franking credits for super funds can be complex and may depend on the type of fund and other factors.
| Type of Fund | Treatment of Franking Credits |
|---|---|
| Self-managed superannuation funds (SMSFs) | Can use franking credits to offset tax payable on investment income. |
| Retail and industry funds | Pass on franking credits to members as part of their dividend income. |
| Public sector funds | Cannot use franking credits to offset tax due to their tax-exempt status. |
Understanding franking credits is an important part of managing your investments, particularly if you are invested in Australian companies or hold shares in your superannuation fund. Consult with a financial professional to ensure that you are maximizing the tax benefits of franking credits in your portfolio.
Eligibility of Superannuation Funds to Receive Franking Credits
Superannuation funds are essentially tax structures that exist for the sole purpose of providing retirement benefits to members. There are two types of superannuation funds: accumulation and defined benefit funds. Accumulation funds are commonly used by most employees while defined benefit funds are generally only awarded to public sector employees and depend on a range of factors such as income, length of service and age.
- In order to qualify for franking credits, superannuation funds must be “complying” funds. This means that they comply with the Superannuation Industry (Supervision) Act 1993 (SIS Act).
- The fund must also meet the definition of a “resident” of Australia. This means that it is either incorporated or based in Australia or that the central management and control of its affairs is within Australia.
- Superannuation funds must also satisfy the “holding period rule” for franking credits. This rule requires the fund to hold the shares for at least 45 days (90 days for some preference shares) in order to be entitled to the franking credits attached to the dividends paid on those shares.
It is important to note that although superannuation funds are generally eligible to receive franking credits, the amount of these credits may be affected by the tax status of the fund and the individual members. For example, if the fund is in pension mode and has no tax liability, the franking credits received by the fund may not be fully refundable.
Additional Information
Superannuation funds can greatly benefit from franking credits as they can result in reduced tax liability and increased returns. The below table outlines the current rates for refundable franking credits:
| Company Tax Rate | Refundable Franking Credits |
|---|---|
| 0% | 0% |
| 15% | 6.429% |
| 30% | 13.333% |
If a company has a tax rate of 30%, for example, and it pays out $1,000 in fully franked dividends, the grossed-up dividend of $1,428.57 includes $428.57 of franking credits. If a complying superannuation fund holds these shares for the required holding period, it will receive the $428.57 franking credit and can use it to offset a portion of the tax it has to pay.
Importance of Franking Credits to Superannuation Funds
Franking credits or imputation credits are tax credits that represent taxes already paid by a company. These credits can be distributed to shareholders as a tax offset for the dividends they receive. Superannuation funds, which are investment funds designed to provide retirement benefits to their members, also benefit from franking credits. Here are some reasons why franking credits are so important to superannuation funds:
- Higher returns: Franking credits can increase the investment returns of superannuation funds. When a company pays dividends, it is required to withhold tax from the payment, which reduces the net amount received by the recipient. However, if the company has already paid tax on its earnings, it can attach franking credits to the dividends it pays. This effectively reduces the tax payable by the recipient and increases the net amount received. For superannuation funds, this means higher returns for their members.
- Reduced tax liability: Superannuation funds are also subject to taxation, but they enjoy concessional tax rates. Franking credits can be used to offset the tax liability of superannuation funds, reducing the amount of tax they pay and increasing their after-tax returns.
- Stable income: Superannuation funds are designed to provide retirement benefits, which means they need to generate a stable income stream for their members. Companies that pay franked dividends are typically mature and profitable, which means they are more likely to provide a stable income stream than companies that do not pay dividends or pay unfranked dividends.
How Franking Credits Work
Franking credits are a dollar-for-dollar offset against the recipient’s tax liability. If a company pays a dividend of $70 and attaches franking credits of $30, the recipient is deemed to have received a total income of $100 ($70 + $30). If the recipient is on a marginal tax rate of 30%, they will have a tax liability of $30 on the $100 income. However, they can claim a franking credit of $30, which offsets their tax liability and results in a net tax payable of $0.
Controversy over Franking Credits
Franking credits have been a source of controversy in Australia, especially in the lead-up to the federal election in 2019. The opposition Labor Party proposed to scrap cash refunds of excess franking credits, which would have affected many retirees and low-income earners. The proposal was seen as unfair by those who rely on franking credits to supplement their retirement income.
| Year | Total franking credits paid |
|---|---|
| 2014 | $20.7 billion |
| 2015 | $22.8 billion |
| 2016 | $23.9 billion |
| 2017 | $26.2 billion |
The table above shows the total amount of franking credits paid in Australia over the past four years. As you can see, franking credits represent a significant amount of money and have a substantial impact on the investment returns of superannuation funds and other investors.
Impact of Franking Credit Changes on Super Funds
Franking credits are a refund of the tax paid by a company on its profits. Superannuation funds have traditionally relied on franking credits to offset their tax liabilities and most Australian super funds receive franking credits. Franking credits boost investment returns, and in some cases, without franking credits, investors may see returns decrease by up to 30-40%. Any changes to franking credits could have a significant impact on super funds, particularly those with high allocations to Australian shares.
- Decreased Investment Returns: Changes to franking credits could result in decreased investment returns for superannuation funds. This would reduce the accumulation of retirement savings for members, particularly those in the accumulation phase. This could have knock-on effects for retirees who may be reliant on their superannuation savings to fund their retirement.
- Reduced Dividends: Franking credits are an important part of the dividend imputation system which has incentivised Australian companies to pay high dividends to shareholders. Any changes to the system may result in fewer dividends being paid out, reducing the income streams of superannuation funds.
- Increased Volatility: Super funds with high allocations to Australian shares may experience increased volatility if franking credits are changed. This would likely reduce confidence in the Australian share market, with investors potentially losing interest in Australian assets altogether.
Super funds have lobbied against potential changes to the franking credit system, arguing that any changes could have significant impacts on the retirement savings of their members. Some retirees may be forced to rely on the age pension if their super funds are negatively impacted by changes to the franking credit system.
Below is a table outlining the value of franking credits received by Australian super funds in the 2018-19 financial year:
| Super Fund Type | Average Value of Franking Credits Received |
|---|---|
| Industry Super Funds | $1,489 per member |
| Retail Super Funds | $762 per member |
It is clear that franking credits provide significant value to Australian super funds and any changes to the system could have significant impacts on their operations.
Comparison of Super Funds’ Returns with and without Franking Credits
If you’re an investor who puts your money into a Superannuation fund, it’s crucial to know the impact of franking credits on your returns. Franking credits, also known as imputation credits, are tax credits that companies can pass on to their shareholders who are subject to Australian taxation. When a company pays tax on its earnings and distributes dividends to shareholders, the franking credits can be used to offset the shareholder’s tax bill.
So, do Superannuation funds receive franking credits? The answer is yes. Superannuation funds do receive franking credits on dividends paid by Australian companies. This is because Superannuation funds are classified as “taxable entities” and taxed on their income. As a result, they’re entitled to the same tax benefits as individual taxpayers.
- However, it’s important to note that not all Superannuation funds are the same when it comes to franking credits. Some funds may have a higher exposure to Australian equities than others, which can impact the amount of franking credits they receive.
- For example, a fund that invests heavily in international equities may receive fewer franking credits compared to a fund that has a higher allocation to Australian equities.
- Additionally, some Superannuation funds may actively manage their portfolio to maximise the franking credits they receive, while others may not give it as much consideration.
So, how does the inclusion of franking credits impact Superannuation returns? The table below shows a hypothetical example of two Superannuation funds with the same portfolio returns, but one includes franking credits while the other doesn’t:
| Superannuation Fund | Annual Portfolio Returns (%) | With Franking Credits | Without Franking Credits |
|---|---|---|---|
| Fund A | 8 | 9.6 | 8 |
| Fund B | 8 | 8 | 8 |
As you can see, the inclusion of franking credits can lead to a higher return on investment for the Superannuation fund. In the example above, Fund A’s return increases from 8% to 9.6% thanks to the franking credits. This translates to a significant difference in returns over time, which can be multiplied through the power of compounding.
In summary, Superannuation funds do receive franking credits on dividends paid by Australian companies. However, the impact of franking credits on returns will depend on the fund’s allocation to Australian equities and whether they actively manage their portfolio to maximise franking credits.
Strategies for Maximizing Franking Credits for Super Funds
Franking credits are an important part of Australia’s taxation system, allowing investors to receive a tax credit for the tax paid by a company on its profits before distributing them as dividends. Superannuation funds also benefit from franking credits, which count towards the fund’s taxable income and can reduce the amount of tax paid. Here are some strategies that super funds can use to maximize their franking credits:
- Invest in franked dividend stocks: One of the easiest ways for super funds to increase their franking credits is to invest in companies that pay fully franked dividends. These companies have paid tax on their profits at the company tax rate of 30% before distributing them to shareholders, who can then claim back the tax paid through the franking credit system.
- Reinvest dividends: Another strategy is to reinvest dividend income back into the same stock, which increases the size of the holding and the franking credits received. Over time, this can lead to a compounding effect, with larger franking credits received on a larger investment amount.
- Consider franking credit ETFs: Exchange-traded funds (ETFs) that track franked dividend stocks can be a great way to gain exposure to a diversified pool of companies that pay franked dividends. This allows super funds to benefit from franking credits while still achieving diversification and avoiding the need to actively manage individual stocks.
When it comes to maximizing franking credits, super funds can benefit from having a long-term investment horizon and focusing on quality companies that consistently pay franked dividends. Fund managers should also consider the impact of franking credits on the overall tax position of the fund and the potential tax benefits of reinvesting dividends. By implementing these strategies, super funds can boost their franking credits and improve overall investment returns.
Franking Credit Rates for Super Funds
The amount of franking credits received by a superannuation fund depends on the rate of tax paid by the company on its profits. As of 2021, the company tax rate in Australia is 30%, meaning that fully franked dividends have a franking credit of 30%. This means that for every $1 of dividend income received, the super fund is entitled to an additional $0.4286 (30% / (1 – 30%)).
| Company Tax Rate | Franking Credit |
|---|---|
| 0% | 0% |
| 15% | 15% |
| 30% | 30% |
| 45% | 30% |
It’s important to note that if a company pays partially franked dividends, the franking credit rate will also be partial. For example, if a company pays a dividend with a franking level of 70%, the super fund is entitled to a franking credit of 21% (70% of 30%).
FAQs: Do Superannuation Funds Receive Franking Credits?
1. What are franking credits?
Franking credits are tax credits that are attached to dividends received by Australian shareholders from Australian companies. These credits represent the tax already paid by the company on its profits.
2. Are superannuation funds entitled to receive franking credits?
Yes, superannuation funds are entitled to receive franking credits on the dividends they receive from Australian companies.
3. How are franking credits treated for tax purposes in superannuation funds?
Franking credits are treated as taxable income for superannuation funds. This means that they are included in the fund’s assessable income and taxed at the applicable rate.
4. Do superannuation funds have to pass on franking credits to their members?
No, superannuation funds are not required to pass on franking credits to their members. However, some funds may choose to do so.
5. Can superannuation funds claim a refund for excess franking credits?
Yes, superannuation funds can claim a refund for excess franking credits that exceed their tax liability. This refund is known as a franking credit refund.
6. Are there any changes to the treatment of franking credits for superannuation funds?
No, there are no current changes to the treatment of franking credits for superannuation funds. However, it is important to keep up to date with any potential changes in legislation.
Closing: Thanks for Reading!
We hope this article has helped answer any questions you may have had about whether superannuation funds receive franking credits. Remember, while superannuation funds are entitled to receive franking credits, they are not required to pass them on to their members. As always, it is important to keep informed about any potential changes in legislation. Thanks for reading, and please visit us again for more informative articles!