Franking credit opportunity before 30 June for share fund investors

From

Denis Donohue

The end of this Financial Year presents savvy Australian share fund investors with the opportunity to top up their franking credits pool and reduce their tax bill.

Franking credits collected by many Australian share funds are frequently not recognised in the Fund’s unit price, in which case Credits are often only distributed at Financial Year End.

A canny Fund investor can effectively buy extra franking credits for a “free kick”, by purchasing additional units in these Funds in the lead up to Financial Year End … simply top up the holdings in the Fund.

If the taxpayer is already invested in this Fund, it’s a simple matter of topping up their holdings ahead of Financial Year End to reap the benefits. While the S&P/ASX200 Accumulation Index Franking Credit return for last 12 months to 30th April was sizeable at approximately 1.5%, it is important to check that the Franking Credits gained through this strategy exceed any entry fees charged on the additional investment.

“One would hope, in the interest of fairness, that eventually all Australian share funds will be like our Pentalpha Income for Life Fund and include franking credits in the daily unit price.

“Unfortunately, many share fund investors are at risk of having their accumulated franking entitlements being raided by opportunistic investors just ahead of franking credit distribution time,” said Denis Donohue, Head of Investments at Pentalpha.

What are franking credits?

Franking credits represent the Australian tax already paid by a Fund’s underlying investments, like the “pay as you go” tax instalments deducted from wages. Franking credits then become available at financial year end to offset the investor’s other tax liabilities.

Franking credits perform the important function of ensuring that taxable earnings are only taxed once – either at the company level or in the hands of its owners when received as dividends from these already taxed earnings.

By Denis Donohue, Executive Chairman and Head of Investments

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