What your SMSF auditor actually needs to see about franking credits

Every SMSF gets audited every year. That is not a risk, it is the schedule. And every year, the same conversation happens between trustees and auditors about franking credits: the return claims a number, and the auditor asks where it came from.

A headline figure in a tracker's year-end summary is a claim, not evidence. The auditor's job is to check the claim, and for franked dividends the check has a specific shape. It is worth knowing that shape before the audit, because it determines what records the fund needs to have kept all year.

The four questions behind every franking figure

For each franked dividend the fund received, the working reduces to four questions.

Which parcel received it? Dividends attach to holdings, and holdings are parcels with acquisition dates. A fund that bought the same company's shares three times holds three parcels, and they can have three different franking outcomes for the same dividend.

Was the parcel held at risk for 45 days? The holding period rule in section 160APHO requires shares to be held at risk for at least 45 days around the ex-dividend date, with the day of acquisition and the day of disposal both excluded from the count. Two parcels of the same stock can pass and fail this test on the same dividend.

Which parcel did a sale come out of? Disposals are traced last-in-first-out under section 160APHI. A sale the trustee thinks came from the oldest holding is, for franking purposes, treated as coming from the newest. This is the step most hand-kept spreadsheets get wrong, because it runs against the intuition most people carry over from capital gains.

Is the fund a qualified person for that distribution? Section 207-145 is where the consequences land: where the tests are not met, the gross-up and the tax offset are denied for that distribution.

If the fund's records can answer those four questions per dividend, the audit conversation is short. If they cannot, someone reconstructs a year of trading history in May.

Why summaries fail the audit test

General trackers are built to answer a different question: how is the fund performing? Their outputs are summaries formatted for the person who already made the trades. The franking number is usually right in aggregate and unverifiable in detail, because the parcel-level working was never recorded, only the total.

Reconstruction after the fact is possible. It is also the most expensive way to do it: the trustee re-derives day counts from broker confirmations, the accountant re-checks them, and the auditor bills the hours. All of that work substitutes for records that could have existed at the moment of each trade.

What evidence-grade records look like

The standard is not complicated, it is just specific. For each dividend: the matched parcels with acquisition dates, the at-risk day count per parcel with the excluded days visible, the LIFO trace for any disposal that interrupted a count, and the provision applied on each line so the checker verifies the source rather than the software's word.

That last part matters more than it sounds. An auditor cannot rely on a black box. A calculation that cites section 160APHO on its day count and section 160APHI on its disposal ordering is a calculation someone else can independently confirm. The output stops being a report the trustee hopes is right and becomes a record a third party can check line by line.

This is the standard we built SMSF Core's audit export against: an information record of the fund's franking position under the published rules, with the working shown. It does not determine the fund's entitlement, and it is not a substitute for the auditor. It is the set of answers the auditor was going to ask for anyway, prepared at the time the trades happened instead of eleven months later.

If your fund's current records cannot answer the four questions above for last year's dividends, that is worth fixing before the next audit, whatever tool you use to fix it.