Imputation credits (or tax credits) can be claimed back in an SMSF. These will either reduce the SMSF’s tax liability or get a refund from the ATO. Imputation credits and franking credit are synonyms.
Imputation credits are the same for an SMSF as it is for an individual. That is, the dividend received is “grossed up” by the amount of the imputation credit to achieve a grossed up dividend. It is on this amount that tax is then assessed at 15%. The Fund is then entitled to a tax offset for the imputation credit, so if the total dividend is $100, the SMSF receives $70 cash and imputation credits of $30, the SMSF will pay tax at 15% on the $100 income = $15 and set off the $30 imputation credit against this tax payable. Otherwise, the ATO will refund the SMSF $15.
The benefit of imputation credits in an SMSF is a tax rate of 15%, while imputation credits from fully franked dividends are 30%. This means that the imputation credit easily accounts for the tax payable on the dividend received, and reduce the SMSF’s tax liability.
Imputation credits are used to reduce the amount of income tax payable by your SMSF, or if the credits exceed the total tax bill, the credits may be refunded to your SMSF by the ATO.
Imputation credits are extremely powerful because the tax paid by an SMSF is 15% when in the accumulation phase and 0% when in pension phase. Therefore, when an SMSF receives a fully franked dividend, the franking credit will not only offset tax payable on the dividend itself, it will either offset tax payable on the SMSF’s other income (including concessional contributions) or be refunded by the ATO.
For more on Income Tax in an SMSF, click here.