State Street ETF in franking credit kerfuffle

Investors and financial advisers were left confused when the almost $4 billion SPDR S&P/ASX 200 Fund (ASX: STW) failed to pay out any franking credits with June's year-end distribution for the first time in its 18-year-long history.

State Street paid out a total of 82 cents per unit in franking credits to its investors for the first three quarters of FY19 in the September, December and March distributions.

However, by the time the final quarter rolled around in June, the ETF had run out of its tax office-approved limit to pass on any franking credits to investors.

State Street has now applied to the Australian Tax Office asking for its choice of this limit called the 'benchmark ceiling' to be revoked, according to August 14 ASX filings.

Meanwhile, more than $130 million net flowed out of the fund in June, stripping it of its title as Australia's largest ETF.

And the future of the franking credits earned during the period remain  uncertain because State Street is not permitted to carry surplus franking credits under the ATO benchmark rule to the next financial year.

What is the 'benchmark ceiling' rule?

Any managed investment schemes, including ETFs, must pass a 'holding test' before they can pass on any franking credits earned on their fund's holdings to the investors, State Street said in a July 19 update.

"The first alternative is the '45 day rule'. Under this test, broadly if a fund has held a share for at least 45 days within a specified period around the ex-dividend date it can distribute any franking credits attached to that dividend," it said.

"The second alternative is the 'benchmark rule'. The ATO publishes a 'benchmark' level of franking and the fund tests its franking credits against this 'benchmark'. The fund can distribute this 'benchmark' level of franking credits plus an extra 20% without any other restrictions applying."

State Street said STW is the only SPDR ETF that uses the benchmark rule and all other use the 45 day rule.

"According to the June 2019 testing, none of the other SPDR ETFs faced any material reduction in the franking credits passed through to investors under the "45 day rule" State Street said.

Read more: State StreetSPDRAustralian Tax Office
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