Franking credits are also known as imputation credits. They’re a credit passed on to shareholders on certain dividends, where a company has already paid tax. Franking credits help prevent a shareholder paying tax twice. Because they’re received/paid as a tax offset, they’re known as credits.
AustralianSuper regularly receives questions from members about franking credits and how these work in relation to their super. Here’s some insight into the most commonly asked about areas.
Franking credits and how they work
In Australia, when companies distribute profits to their shareholders, they have the option of passing on or 'imputing' credits for the tax that’s already been paid by the company. This is called ‘franking’ the distribution and it prevents double taxation. The franking credits are attached to the distribution and the recipients can use them as tax offsets.
Companies can pay a fully or partially franked dividend. A fully franked dividend means the company pays tax on the entire dividend, so the investor receives all the tax paid on the dividend as a franking credit.
Franking credits are refundable to people whose total franking credits exceed their income tax liability for the year. This can increase the income of people with portfolios of fully franked shares who don’t pay tax (such as retirees in pension phase and charities), and those on lower marginal tax rates than the company tax rate of 30%.
Taxable profits, dividends and income tax
Generally, if a company's taxable income is greater than its deductible expenses, it’s made a taxable profit. In ordinary circumstances, this profit is taxed at the legislated rate, which in Australia for big companies is 30 cents on the dollar.1
Dividends represent a portion of a company’s profits that are paid out to shareholders. This payment is part of your return for investing in a company, and dividends can vary from year to year. For example, Woolworths Group Ltd paid a dividend of 46 cents per share in April 2020, while over the last 2 years their semi-annual dividend ranged from 43 cents to 57 cents per share.
The value of the dividends that companies pay to shareholders generally depend on the company’s performance and strategy.
Personal income tax
Generally, you pay tax on the amount of income you earn, unless that income is below the $18,200 tax-free threshold or classified as not taxable. The rate of tax depends on your level of income. The more income, the higher the tax rate. Residents earning more than $180,000 (the top threshold) pays 45 cents on each extra dollar earned plus 2% Medicare Levy.2
Dividends from shares are considered income and so are taxed along with other income. Where dividends have been franked, the credit’s applied as a tax offset to reduce tax payable on taxable income.
How AustralianSuper manages franking credits
Currently super funds pay a maximum of 15% tax on contributions and investment earnings for members’ accounts in the accumulation phase, and for members in Transition to Retirement (TTR) accounts. Investment earnings on members’ accounts in the pension phase are exempt from tax.
Australian shares held by the Fund on behalf of members generate franking credits. These credits reduce the total tax the Fund pays. We achieve this because the assets which support each investment option across the accumulation and pension phases are held in the one entity..
Members who still contribute to their super or have retired and have an account based pension (Choice Income), and have an investment option that includes Australian shares, will receive their share of credits.
Each investment option is allocated the benefit through the crediting rate process to the extent those options have exposure to Australian shares. AustralianSuper super members who are still contributing to their super, or have a retirement income account (account based pension), will receive their respective share of the benefit of the franking credits throughout the year.
The benefit of franking credits on investment returns shows in the performance of the option. The rate applicable will depend on the investment option, given the exposure to Australian shares is different for each option.
How franking credits are treated in the Member Direct option
With Member Direct, AustralianSuper’s direct investment option, members can choose from shares in the top 300 companies listed on the ASX, a selection of exchange traded funds (ETFs) and term deposits with varying maturities. Members can combine these with the managed options, to dial up or down how much of their portfolio they want to invest directly themselves.
The Member Direct investment option attributes franking credits to members based on their investment choices, so they receive their respective benefit of those franking credits. This will then show in members' investment returns.
1. This calculation is based on the full company tax rate of 30%. More information on this can be found on the ATO website.
2. Latest individual income tax rates can be found on the ATO website.
This information may be general financial advice which doesn’t take into account your personal objectives, situation or needs. Before making a decision about AustralianSuper, you should think about your financial requirements and refer to the relevant Product Disclosure Statement. AustralianSuper Pty Ltd ABN 94 006 457 987, AFSL 233788, Trustee of AustralianSuper ABN 65 714 394 898.