Holding Bank stocks in Super fund

I'm in the process of transferring my pension over from the Uk.
I was thinking of putting some of the funds, perhaps 30% into the big four Bank stocks to take advantage of the dividends and franking credits.
I don't fully understand franking credits and how they would work within Super, however I seem to recall reading somewhere that this is a good idea.
Is anyone here doing the same and has it proved to be a good strategy?
I have 11 years until I can draw the funds. The rest of the funds I intend putting into more growth orientated funds, such as the CFS geared Australian. However I would like to add some stability with something like the bank stocks.
Thanks for anyone's thoughts or ideas on this one.

Note that you will be very exposed to bank stocks if you also put money into something like the CFS geared funds ... since they also hold the banks.

As at 30th June, CFS Geared Share fund held the following as their top-10 positions:

BHP Billiton Limited 10.82%
Commonwealth Bank of Australia 6.25%
National Australia Bank Limited 6.20%
Australia and New Zealand Banking Group Limited 4.96%
Westpac Banking Corporation 4.75%
Rio Tinto Limited 4.32%
Macquarie Bank Limited 3.64%
Brambles Limited 3.01%
AMP Limited 2.77%
Transurban Group Stapled Security 2.69%

... but if your alternative was to just invest it all in the four bank stocks, I think the diversification and leverage of a geared fund is probably worth it.

I don't have an opinion either way on bank stocks though!

Bank earns $100
Pays tax $30
Distributes franked dividend $70

Super income $70
Add back franking credit $30
Taxable income $100

Tax @ 15% $15
Less franking credit $30

TAX REFUND $15

In reality set off against liability on other sources of income.

In other words a super fund should not be paying tax in accumulation by including franked dividends in their protfolio.

Cheers,

Rob

Beautiful, isn't it!
Another way to think about it:
Bank pays dividend of $70 fully franked
This is $100 grossed up ($70/[1-0.30] or $70 x 1.43)
Tax on $100 gross at 15% (super) = $15.

Effective dividend $85 after tax.

But Rob's example details the flow of money, ie dividend then tax refund follows.

Thanks. So to clarify. By including such stocks in my Super Portfolio, I could theoretically avoid having to pay any tax on income derived from the whole portfolio.
Is that correct? In which case the answer to my original question must be, yes, they are good stocks to hold in Super!

Stocks which pay franked dividends are very desirable (provided all other criteria are met - e.g. risk).

As Rod pointed out, the before-tax return is 1.43 x the nominal return.

The company has paid 30% tax, whereas the fund would have only paid 15%. So a 15% refund is in order - or set off against other tax liabilities.

Don't forget stocks that provide a capital gain, the fund only pays 10% CGT - maybe nil if held to 60 yrs old !!! This is effectively a tax-free compounding dividend reinvestment plan ??

Note what Sim mentioned about diversification. If you are holding leveraged investments outside super in the very same banks you hold inside super then all your investments are exposed to the same asset class risk.

Cheers,

Rob

Hi Lorrimer,

Quick question, which super fund are you using for QROPS?
Also how long have you been an Australian citizen (if you are now)?

Cheers,

Dan

Dan,
BT Superwrap. Funds are sitting in their cash account at the moment until I decide what to invest in. Have been resident since 2002 but a citizen for only about a year.

If you are keen on bank stocks, then you might also like installment warrants on bank shares within your super fund. These are geared investments that are allowed in super, which pay a hefty fully franked dividend, up to 2x the regular divi, so up towards 9% fully franked! Of course you are taking on added company & sector risk with the gearing...

Rod,
Thanks very much for your responses. I'm a little confused with your example above.
Wouldn't you receive the grossed up ($100) in addition to the $15 tax refund = $115?
If this were not the case, then if you had to pay 30% tax instead of 15%, then you would still only receive $70 (100-30 tax). So no advantage of having the imputation credit.
Would be very grateful if you could clarify this for me,
Thanks