SMSF Investment Strategy Secrets – ASX Dividends

By setting up and managing a Self Managed Super Fund (SMSF) you have complete control over the fund’s investment strategy and the financial instruments that can be invested in. A SMSF can have up to four members with each member being a trustee (If there is a corporate trustee they will be directors).

Unlike managed funds, a SMSF, when set up correctly, can invest in a wide range of securities such as shares, exchange traded funds (ETFs), term deposits, government and corporate bonds, CFDs, options, managed funds, investment properties and the list goes on.

With these choices available it is important to understand the responsibilities and compliance requirements that come with managing the SMSF and whether you can outperform professional super fund managers by taking into account the various costs. With smaller SMSF accounts, the cost of investing, as well as the running costs of accounting and auditing can be more expensive than using a professionally managed super fund.

If you decide that a SMSF is right for you, there will be various resources required to help you succeed with your investments into retirement. When purchasing Australian ASX shares you will need to find an appropriate stock broker to buy and sell shares with as well as a CFD provider if you are hedging downside risk while accumulating franked dividends.

The TopBrokerSites.com comparison site lists a number of stock brokers that have various features and pricing models to purchase and sell shares. There is also the option between advisory stock brokers and online discount stock brokers, with advisory stock brokers giving fundamental and technical advice on potential share ownership. The cost for advice is usually included in the share purchase which will usually be significantly more expensive than the discount online brokers. The major banks in Australia have online discount trading available either directly, or through a subsidiary for low cost trading, and private client divisions available for clients that are after professional investment advice. Outside the major banks companies such as CMC markets, and Bell Direct offer online discount share trading.  If you understand leveraged trading and the associated risks IG Markets, First Prudential markets, City Index and TradeDirect365 offer leveraged trading of ASX share CFDs as well as Index and Forex trading products. TradeDirect365 allow clients to open SMSF accounts for CFD investing and hedging purposes

Franked ASX Dividends

Shareholders receive a rebate for the tax paid by companies on profits that are distributed as dividends. The current company tax rate is 30% but is expected to drop to 28.5% in coming years. A dividend which is “franked” has a credit attached which represents the tax a company has already paid. A franked credit is also known as an imputation credit.

Imputation Credit Refund

Cash refunds are available when the imputation credits attached to the franking credits paid exceeds a persons’ income tax liability for the tax year. So if your top tax rate is less then the company’s rate of 30%, the ATO will refund the difference. If your tax rate is above the company rate then your income tax liability is reduced.

45 day rule for Franked ASX Dividends

The 45 day rule was introduced on the 1st July 2000 to stop dividend stripping. Investors need to hold an equity for at least 45 days plus the day of acquisition and disposal to benefit from the imputation credits on franked dividends.

70% Hedging Rule

An additional rule is that no more than 70% of the equity investment position can be hedged.

Exceptions for individual investment accounts

An important exception to the 45 day rule is that individual investors are entitled to a maximum $5000 in total franking credits a year. This exception is for individual Australian taxpayers only and not available for SMSF accounts.

The 12 month 50% Capital Gains Tax allowance

Shares that are held for 12 months or more are in most cases allowed a discount of 50% at the time capital gains taxes are calculated. Inside a superannuation account the CGT gain is reduced by one third.

Potential ASX Dividend Strategies

CFDs are a popular way of hedging portfolios and can be applied during times when stocks go ex-dividend to reduce the risk of large losses with sudden market falls. The risk in holding a stock position can be reduced to 30% using CFDs to sell (short) a stock.

Another strategy is to hedge using CFDs when a stock is believed to be overbought and the expectation is that lower price levels are likely. This strategy can be essential when locking in capital growth profits and realising the 12 month CGT discount of 50%.

Costs of hedging then becomes the primary concern when CFD hedging. The commission charged is vitally important and the overnight holding costs also need to be taken into account. Generally the interest rates are low for holding “short CFD positions” with most providers charging 2.5%, less the current RBA rate which at the time of writing this article was 1.75%.

There is a strategy that is popular in the media of buying in the lead up to the ex-dividend date with the expectation that price will move higher and then selling once the stock goes ex-dividend (the holding period would need to be at least 47 days in a superannuation account for franked dividends). The expectation is that buyers will push price higher in the lead up to the dividend date and the potential for an overall gain can be made as well as capturing unfranked dividends. My opinion is that this strategy has a high degree of risk and is more dependent on future market conditions for the stock which are unknown at the time of entry. Be very wary of this strategy when markets are weak as the capital losses can easily be greater than the potential franked dividend gains in the stock if it moves lower at the dividend time.