How do tax credits work?
Tax credits are received by the shareholder with franked dividends. This is a credit for tax that has already been paid by the company at the rate of 30%, before the company’s profit was distributed as dividend. The shareholders income from dividends will only be taxed at the difference between their marginal tax rate and the company tax rate of 30%.
How does this apply to dividends in a SMSF?
This system makes investing in shares that pay franked dividends an important strategy for self-managed superannuation funds (SMSFs). Funds will either pay reduced tax, no tax, or receive a tax refund as a result of their tax credits. This occurs because superannuation funds pay only 15% tax on earnings while in accumulation phase, and 0% tax on earnings in pension phase (once your retire).
What’s the result for an SMSF in pension phase?
For every $1 of franked dividend paid to shareholders, the SMSF will actually receive $1.43, where the additional 43 cents comes as a tax refund. Let’s say a share portfolio of $800,000 has a dividend yield of 5%, this would generate income of $40,000, and, when the fund completes its tax return it would receive an additional $17,143 as a tax refund.
Does this benefit only those with a self-managed super fund?
Tax credits are beneficial for all investors, even for those without a self-managed super fund. We can advise you how to structure superannuation to your advantage, and whether an SMSF is right for you.