How Are Franking Credits Refunded to an SMSF?
An SMSF prepares the fund’s annual return and lodges it with the ATO to claim the benefit of franking credits. In circumstances where the fund is in a refund, such as during pension phase, they the return results in a refund of franking credits. For this reason, we get a huge number of SMSF tax returns completed and lodged in July to assist clients cashflow to access the franking credit refunds.
Receiving franking credits in an SMSF provide a significant tax advantage. Regardless of whether an SMSF is receiving exempt income while in pension mode, has tax losses, or has a nil tax liability, franking credits are fully refundable. The credit is either offset against the fund’s tax payable thus reducing the annual tax payment or refunded for clients with no tax to worry about.
Where you expect your SMSF to receive a refund due to franking credits, it is crucial to ensure:
- all records are updated – where direct data feeds are available, this process is streamlined
- the fund’s annual return is prepared and lodged as soon as possible after 30 June
- accurate reporting of dividend statements – direct data feeds ensure the details are processed correctly, including ex and cum dividend dates so the right to franking credits is not missed
What is a franking credit?
Franking credits are also known as imputation credits. A company pays tax before it distributes income to its shareholders. A franking credit is attached to that dividend, representing the tax the company has paid. A company is subject to either 25% or 30% tax. It pays 25% tax provided it meets the $50 million threshold and the passive income test. Dividends can be fully franked, partially franked, or not franked at all. The examples below assume a 30% tax rate with fully franked dividends.
Example – Only income is a BHP fully franked dividend
| BHP dividend | $10,000 |
| Franking credit ($10,000/7×3) | $4,286 |
| SMSF taxable income | $14,286 |
| Taxed at 15% (100% in accumulation phase) | $2,143 |
| Franking credit | ($4,286) |
| Tax refundable | ($2,143) |
The fund obtains a return of $12,143 on its BHP shares
Example – Employer contributions and a BHP fully franked dividend
| BHP dividend | $10,000 |
| Franking credit | $4,286 |
| Employer contributions | $50,000 |
| SMSF taxable income | $64,286 |
| Taxed at 15% (100% in accumulation phase) | $9,643 |
| Franking credit | ($4,286) |
| Tax payable | $5,357 |
The excess franking credits reduce the contributions tax by $2,143.
What is dividend washing?
An SMSF sells shares when they go ex-dividend (no right to franking credits) and then repurchases an identical parcel of shares. This strategy effectively doubles the franking credits. The SMSF sells the shares on the normal Australian Stock Exchange (ASX) when they go ex-dividend, and then purchases identical shares on the special ASX market when they trade as cum-dividend (with the right to franking credits).
Under the integrity rules, the ATO will deny the franking credit on the 2nd dividend received where the intent was to obtain the double franking credit. The ATO views this strategy as undertaken solely to obtain the benefit of the double franking credit and for no other commercial reason.
What is dividend stripping?
Dividend stripping generally occurs when an SMSF acquires shares cum-dividend and sells them ex-dividend. The fund receives a dividend, an imputation credit, and a capital gain or loss. The shares are acquired and sold very quickly to obtain the imputation credit without significant holding risk. The 45-day holding rule was introduced as an anti-avoidance measure to prevent shareholders from stripping imputation credits from dividends by rorting the tax system.
How does the 45-day rule work?
The ATO introduced this integrity measure to ensure franking credits did not go to short-term traders but rather to genuine investors holding shares “at risk”, who are exposed to market fluctuations.
An SMSF must hold its shares for 45 days (excluding the day of purchase and the day of sale), or for 90 days for preference shares, to be entitled to the franking credit. The ‘last in first out’ (LIFO) methodology is used to assess whether the fund held the shares for the required period, so the last parcel of shares the fund acquired must be held for 45 days.
Individuals can claim franking credits up to a $5,000 threshold where the 45-day rule does not apply. However, the threshold does not apply to an SMSF.
Example – SMSF holds NAB shares for 25 days
- The SMSF acquires 200 shares in NAB on 1 April 2026
- A dividend of $0.85 is paid on 2 May 2026, fully franked
- 100 NAB shares are sold on 5 May 2026
- 100 NAB shares are sold on 25 June 2026
The first 100 shares sold were held for 30 days, excluding the acquisition and sale dates. The second lot of NAB shares was held for 84 days, excluding the acquisition and sale dates.
Only 50% of the franking credit is allowed. $85 is processed as an unfranked dividend with no franking credit, and $85 is processed as a fully franked dividend with a franking credit of $36.50.
| NAB dividend | $170 |
| Franking Credit | $73 |
| SMSF taxable income- $36.50 franking credit is denied | $206.50 |
| Taxed at 15% (100% in accumulation phase) | $31 |
| Franking credit ($36.50 being 50% of the dividend held longer than 45 days | (36.50) |
| Tax refund | ($5.50) |