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How do 'direct investment options' deal with franking credits?

There has been a lot of interest from readers of Cuffelinks on the potential impact of the Labor Party’s proposed changes to imputation credits, particularly for SMSF members and self-funded retirees. It has highlighted differences in understanding of how super funds are taxed and the strategies available to members seeking more control over how they invest their super.

Myriads of super choices offer different levels of control. Before individuals choose a strategy, it’s important that they consider how much responsibility they want to take on themselves, the investment choices on offer, the types of features they need and how much they’re willing to pay for them.

Here are some of the key differences between retail wrap accounts and the 'direct investment options' offered by leading industry funds, and the potential impact the proposed changes might have on these options and SMSFs.

What’s the difference between a direct investment option and a wrap?

Typically, wrap accounts offer a broader range of investment options and fund manager choices, as well as having additional flexibility regarding transfers of assets (e.g. in-specie shares). Given the complexity and range of investment offerings, they are designed to be accessed under the guidance of a financial adviser, who can provide personalised advice on the best mix of assets for each individual. Some providers offer direct access to their platforms to retail investors but the fees can be prohibitive for members who may not be interested in, or don’t have the knowledge or capability to, navigate a large investment menu.

With the direct investment option offered through AustralianSuper, called Member Direct, members can choose from shares in the top 300 companies listed on the ASX, a selection of exchange traded funds (ETFs) and term deposits. Members can combine these with the managed options and dial up or down how much of their portfolio they want to invest directly themselves. The investment menu is more limited in comparison to wrap accounts and there are trustee-prescribed investment limits to encourage members to make investment choices that maintain diversification.

Our research shows some members want the control of managing their own money, but also want the comfort that comes with having some of it professionally managed. On average, members in Member Direct invest around 30% of their portfolio themselves, while keeping the remainder invested in the Fund’s professionally-managed diversified options. Some members see the option as a stepping stone to an SMSF, while it provides others with greater control and flexibility over their investments in an APRA-regulated fund.

Who offers direct investment options and how do they work?

Direct investment options are offered by a number of leading industry funds. Members buy and sell investments on an online platform, which is operated by a third-party who also provides execution services, market news, data and research. Investors need to be a member of the fund and invest a portion of their portfolio in the fund’s other investment options.

While direct investment options may not offer all the bells and whistles of some wraps, they may be a lower cost option for people wanting to be more involved in managing their super portfolio. They offer features like real-time trading, high interest cash accounts, dividend reinvestment plans, independent company research and consolidated tax reporting.

Accumulation members can also retain the benefit of the low-cost insurance cover they have through their super fund. While the Member Direct option doesn’t currently allow in-specie transfer of shares held outside the Fund, members can transfer shares from a Member Direct accumulation to Member Direct retirement income account without incurring capital gains tax on unrealised capital gains.

How are franking credits managed and how might Labor’s proposed changes affect members?

Based on announcements that have been made to date, the impact of Labor’s proposed changes differs according to the tax-paying status of each superannuation vehicle.

AustralianSuper is a single taxpayer which pays tax at the entity level rather than the individual member level. It pays a significant amount of tax on its contributions and investment income derived from assets that support member balances in the accumulation phase.

The Fund uses its total franking credits to offset the total tax liabilities it pays. It achieves this because the assets supporting each investment option across the accumulation and pension phases are combined in the one entity. The franking credits are then allocated to the investment options that have exposure to Australian equities. For example, franking credits received in the Member Direct investment option are attributed to members in the option so they receive their respective benefit of the credits.

While the Fund remains a significant taxpayer, the proposed changes are not likely to materially impact investment returns. By contrast, other funds that have low or no investment income taxed in the accumulation phase, low or no taxable contributions and have a high exposure to Australian equities are more likely to be negatively impacted by the proposed changes. For example, SMSFs that don’t have sufficient tax liabilities to fully offset imputation credits may lose the benefit of the cash refund. Under the proposal, SMSFs that had at least one member who was receiving a welfare pension (such as the age pension) before 28 March 2018 will not lose the benefit of the refund.


Tom Garcia is Head of Product and Communications at AustralianSuper. AustralianSuper manages more than $132 billion of members’ assets on behalf of more than 2.2 million members. More than 14,000 members invest in the direct investment option, Member Direct.

This information is general information which does not take into account the personal objectives or needs of any investor. Before making a decision about AustralianSuper, you should think about your financial requirements and refer to the relevant Product Disclosure Statement.

James W
September 19, 2018

It should be mentioned that there are many other direct investment options out there that offer the same, if not better, features talked about in this artilce. ING,, HUB24 all spring to mind.

Graham Hand
September 19, 2018

Hi James, the issue is not whether another platform, such as the managed accounts you mention, allows investments in shares, but whether the whole platform is taxed as a single entity. When it is, as described by AustralianSuper, the franking credits can be allocated to those who own Australian shares, including people in pension accounts. Here's the relevant section:

"The Fund uses its total franking credits to offset the total tax liabilities it pays. It achieves this because the assets supporting each investment option across the accumulation and pension phases are combined in the one entity. The franking credits are then allocated to the investment options that have exposure to Australian equities. For example, franking credits received in the Member Direct investment option are attributed to members in the option so they receive their respective benefit of the credits."

Tom Garcia
June 20, 2018

Hi Geoff
You can find out more about how the Balance Booster works in our Choice Income PDS available at
You can also view details of the Seamless Transfer feature at

June 21, 2018

Thanks for your efforts to respond Tom.

Geoff F
June 22, 2018

Thanx for ur informative responses to the various queries.

June 15, 2018

I am not sure I understand Tom's answer to Geoff's specific query: when an accumulation member transfers intra-fund to pension phase, the deferred tax liability charged over the years to that member on unrealised capital gains is no longer required as a provision, and must equitably be credited back to the member using an analogous approach.

Is this done or not?

And if it is a deferred tax asset (on unrealised capital losses) how is it treated?

Tom Garcia
June 18, 2018

Hi Phil and Ramani,
There are some funds that cater for members moving from accumulation to pension and consider the tax impact. On 2 July 2018, AustralianSuper will introduce “Balance Booster”, which will pass onto members a credit to reflect the “provision for tax on unrealised gains” when they move from super or TTR Income to pension. Within the Member Direct option, members can use “Seamless Transfer to Retirement Income” to move their shares and ETFs from super to pension phase tax free without generating a capital gains event.

Geoff F
June 19, 2018

The Balance Booster is a good initiative, ditto Seamless Transfer ...
How will the Balance Booster mechanism work? How transparent will the reporting of it be?
Will there be a unit price adjustment shown against each investment option's unit price?
Will it all be detailed in the various PDS's?
I''ll be interested in how it all works.

Tom Garcia
June 14, 2018

Hi Geoff and Phil, while we can’t comment on other funds, we would like to confirm that AustralianSuper allocates franking credit benefits to each investment option based on their allocation to Australian Shares. Our process ensures crediting rates for members in the pension phase include their respective benefit of franking credits. You can view the returns for both our accumulation and retirement income options on our website at

Robert M
April 23, 2019

Hi Tom
How can an AustralianSuper member in pension phase who has a portfolio with 80% in franked listed shares have those shares benefit from an improved crediting rate when the price of a listed share is set by the sharemarket?

Geoff F
June 14, 2018

Thanx for ur comments.
Come on Tom, please give us the benefit of your knowledge and experience!
Another elephant in the room, because they aren't solitary animals, is what happens to the benefit of the reduction in the "provision for tax on unrealised gains" associated with a superfund member when they move from accumulation phase to pension phase. This benefit should follow the member - but on my reckoning and understanding, unless the funds have a specific policy which caters for it, it doesn't, and it gets absorbed by the accumulation phase members, which doesn't seem equitable.

Geoff F
June 12, 2018

It seems there are a number of perfectly reasonable and legitimate questions above which remain oustanding, but for which responses would be educational and informative.
Does anyone have any insights, either in relation to Australian Super or other industry or retail funds? Of course, different funds may well have different policies.
Shedding light on such policies would be a positive thing from perspective of both existing and potential members.

June 12, 2018

Hi Geoff, I've done a lot of calculating using unit prices for different industry and corporate funds and the differences in return between pension phase and accumulation. There is a lot of hit and miss in terms of who in pension phase seems to benefit fully from refunded credits and where the accumulation members get the benefit of the franking the pension members would be eligible for. It's the elephant in the room that industry funds and corporate funds don't like to talk about. The answer is in whether the fund choices have their own statutory accounts or are pooled for tax per the above re Australian Super. These are legacy issues for very old funds with single statutory accounts. The cynical side is they use advertising to say returns are high using the Accumulation accounts only, which have lower tax rates because they use the franking from the pension accounts. My view only, do you your own research.

June 11, 2018

Hi Tom, Can you confirm if you are not in Member Direct, but in Pension phase, because it's not member specific tax, that Pension phase members don't receive the full benefits of refunded franking as if they were all in Member Direct and in Pension phase?

Tom Garcia
June 14, 2018

Hi Phil, the assets supporting each investment option across the accumulation and pension phases are combined in the one entity. The franking credits are then allocated to the investment options that have exposure to Australian equities. This means that all members in the pension phase, whether they’re in Member Direct or another investment option, will receive their respective benefit of the credits.

Peter Fisher
June 10, 2018

You spoke about member direct , please confirm if the same applies to WrapAccounts where the member is in pension phase or do Wrap Account members suffer the same fate as SMSF members where all members are in the pension phase ie the cash refund is denied.

Tom Garcia
June 14, 2018

Hi Peter, we can’t comment specifically on how individual Wrap Accounts work. However, based on the announcements to date, members in the Member Direct option are likely to continue to retain the full benefit from the franking credits.

June 10, 2018

The killer question left unanswered is whether the "full" value of the franking credit ie 42.85c in the $ for fully franked shares, actually flows thru in the member directed options. Check your statement - my belief is that in many instances there is a "haircut" sanctioned by the ATO to make the accounting easier ...

Tom Garcia
June 14, 2018

Hi Robert, members in the Member Direct option receive the full benefit of franking credits. A dividend report detailing unfranked and franked income, franking credits, tax withheld and net dividend income is available for members to download from the Member Direct platform.

Kressley Gunn
June 14, 2019

Hi Tom, I have just checked my Income Report within Members Direct. It seems that I have received a franking credit if the income is classed as a dividend.However, if it has be reinvested, it is classed as a distribution. These distributions don’t have any franking credits attached to them even though some of them are Australian ETFs (VAS, IOZ). Why are franking credits available for dividends, but not distributions?

Kressley Gunn
June 14, 2019

Hi Tom, my observation is that I don’t have any foreign tax credits against my international ETFs (VTS, IVV, VEU) though there is a foreign tax credit column on the income report. How come there are no foreign tax credits available? My income report dates are 01 July 2018 to 14 June 2018. Thanks for your replies.

Tom Garcia
June 08, 2018

As the proposed policy currently stands, people in the direct investment option who currently receive a franking credit refund in the pension phase will continue to receive these benefits.

Tom Garcia
June 08, 2018

Yes, Matthew you are correct.

June 08, 2018

Hi Tom,
Thank you for your excellent article. Can you please clarify how franking credits may be effected with a direct investment option BUT in pension mode. i.e. Nil tax option.
Is the single taxpayer situation also cover the pension umbrella ?

Steve Dixon
June 07, 2018

“Hi Tom. As the holder of an SMSF, I’m also interested in understanding how capital gains tax is treated in a Direct Investment Option. If someone were to invest in one or more ETFs or LICs (100% fully franked), utilise a Dividend Reinvestment Plan strategy and hold these assets (with no disposal) right through through to retirement could you then in-specie transfer these assets into an account based pension without incurring any capital gains tax (for the life of the investment) on unrealised gains? Combined with the benefit of franking credits this would be quite compelling.”

Tom Garcia
June 08, 2018

Yes the Member Direct option offers a facility called Seamless Transfer, which allows you to open a retirement (Choice Income) account and transfer your Member Direct account in super to your Member Direct retirement account tax fee. This means you don’t need to sell-down and re-purchase your holdings, avoiding transaction costs and market risk. More importantly, by using Seamless Transfer, you do not trigger a capital gains tax (CGT) event thereby avoiding tax on the gains you may have in Member Direct.

The Member Direct option allows capital losses to be carried forward, which can provide members with tax benefits. A capital loss occurs when an asset loses value in between buying and selling it. Although realised net capital gains must be taxed each year, realised net capital losses can be carried forward, to be offset against future capital gains. The Member Direct option allows you to carry forward any realised net capital losses in relation to the sale of listed securities to offset against future gains.

Members who want to close their Member Direct account who are in a net capital loss position will receive a CGT credit representing 10% of their net loss position.

You can find out more about these features at

June 07, 2018

Very good exposition. What is still unclear to me is the detailed way franking credits are reconciled and attributed to the accounts in a super fund like Australian Super. Is attribution at the security (interest) level? Or is the credit attributed at the asset value level of the account? Certainly, at the aggregate level, one can see how franking credits may be used as a partial offset to contribution taxes. But how granular are the systems? Perhaps a member direct account heavily skewed to Australian shares with franked dividends may only receive a portion of the franking credits gathered from the broad investment activity of the Fund rather than the exact credit due to the inability of systems to perform the task. To accurately perform the attribution, each total holding of a franked share would need to be sliced and diced between accumulation accounts, pension accounts and member directed accounts. I suspect now the aggregate franking may be split by only one gross entry.
It is a bit hard to know the systems design as any customer service person you might ask would not have the depth of knowledge as to the accounting and tax systems.
Still, perhaps the member direct option may be a good option if it ever comes to that. One also suspects that the funds themselves due to their heritage may in time treat members in line with a policy successfully implemented by a Labour government. Such a change may be in conflict with the fiduciary duty of the trustees.

June 07, 2018

I agree with you, Bruce, this is an excellent explanation of a difficult topic.

I am wondering if your question is answered by the statement made by Tom:

"For example, franking credits received in the Member Direct investment option are attributed to members in the option so they receive their respective benefit of the credits."

It sounds to me that the franking credits from the member direct option are isolated and given to the member who owns the shares. Perhaps I am being overly simplistic, but I hope that I am correct as this would result in this option being very useful in the event that there is a change in legislation.

Felix Huxley
June 07, 2018

Tell me again why anyone would be interested in an SMSF? The better run industry funds have outperformed most SMSFs in recent years. Further, the anti-industry fund Coalition is harping on about the lack of independent directors on industry fund boards but doesn't see a problem with SMSF's having Mr and Mrs Average with no idea about trustee obligations, super regulations or investment management.

SMSFs have become another golden egg laying goose for accountants and financial advisers who get to charge their feckless clients to run something that they could easily have run by professional corporate or industry funds.

Alf Petersen
June 13, 2018

Felix, yes, SMSFs do have fees for accountants and auditors. But they do not attract huge fees from so called investment advisors unless they choose to.
Neither do they have the fees that industry funds attract.
I would prefer my SMSF any day as regards to fees.

June 07, 2018

Regarding your comment "Under the proposal, SMSFs that have at least one member who was receiving a welfare pension (such as the age pension) before 28 March 2018 will not lose the benefit of the refund", my understanding was that any SMSF-member IN PENSION PHASE BEFORE 28 MARCH 2018 (but not necessarily on Centrelink welfare) would remain entitled to franking credit refunds. Could you please clarify this?

Graham Hand
June 07, 2018

Hi Peter, the Labor policy says: "The Pensioner Guarantee means pensioners and allowance recipients will be protected from the abolition of cash refunds for excess dividend imputation credits when the policy commences in July 2019. Self-managed superannuation funds with at least one pensioner or allowance recipient before 28 March 2018 will also be exempt from the changes."

In this context, I read 'pensioner' to mean social welfare recipient, not receiving a pension from a super fund, so I don't believe you are correct at the moment. Of course, the final legislation, if it happens, could be different. But 'protecting pensioners' is unlikely to mean someone with a big SMSF in pension phase.

That's my interpretation, but to confirm, see:

Geoff F
June 07, 2018

Thanks for your article.
I would appreciate your thoughts on whether, under Labor's proposed policy of not refunding excess franking credits, if someone holds a portfolio of Australian shares paying franked dividends via a "member direct" or equivalent option In a non-SMSF super fund, such as an industry or retail fund, and which is able to fully absorb all franking credits on aussie shares held by the fund, and someone else - or even the same person - held an identical portfolio via an SMSF fund, you think it appropriate, that the tax outcome should be identical. Thanx.

Geoff F
June 15, 2018

It may have been a bit cheeky of me to ask Tom to respond to my above query.
Would anyone else like to comment?!!


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