Franking Credits

Australia stops company profits being taxed twice through a system called dividend imputation. The company pays tax on its profit first: 30% for most companies, or 25% for a base rate entity, broadly one with aggregated turnover under $50 million and no more than 80% passive income. When it pays a dividend out of taxed profits, it can attach a franking credit for the tax already paid. The credit is not cash. It records tax paid on your behalf, which you claim through your own return.

A dividend is fully franked when it carries the maximum credit the company’s rate allows, partly franked when it carries less, and unfranked when it carries none. A company can’t frank above 100%, and it is generally required to frank all its distributions in a franking period to the same extent, known as the benchmark rule; a breach triggers over-franking tax or an under-franking debit.

As a shareholder you add two amounts to your assessable income: the cash dividend and the credit. Together they are the grossed-up dividend, taxed at your own rate. The credit then comes off your bill as a franking tax offset, which works like a refundable tax credit: it can reduce tax on any income, including wages and capital gains, not only the dividend. In effect, the company’s tax becomes a prepayment of yours.

The credit depends on the franked amount and the company’s tax rate for imputation purposes. For a fully franked dividend from a company taxed at 30%, the credit is 30/70, about 42.86%, of the cash dividend. A $700 dividend carries a $300 credit, and $1,000 goes into your income, which is exactly the pre-tax profit behind it. At the 25% base rate, the credit is 25/75, or one-third of the dividend.

For a partly franked dividend, apply the formula to the franked part only. If a company taxed at 30% pays you $1,000 of which $600 is franked, the credit is $600 × 30/70 = $257.14, and the unfranked $400 carries none. Your dividend statement normally does this for you, listing the franked amount, the unfranked amount and the credit.

On an individual return, direct shareholdings go at question 11: unfranked dividends at label S, franked dividends at label T and franking credits at label U. Credits that arrive through ETFs and managed funds are reported with their distributions at the partnerships and trusts question instead.

Yes, for eligible Australian-resident individuals, and they have been since 1 July 2000. The ATO applies your credits against income tax and the Medicare levy first and pays the rest to you in cash. That makes franked shares valuable to people with low taxable incomes, such as retirees whose super pension is tax-free from 60 and who also hold shares in their own names. You don’t need a tax bill to benefit: if you aren’t otherwise required to lodge a return, you can apply for a refund of franking credits on its own.

Complying super funds also get a refundable franking credits offset. A fund in the accumulation phase pays 15% tax, so a credit worked out at 30% more than covers the tax on that dividend, and the rest reduces tax on other fund income. A fund paying retirement-phase pensions pays no tax on the income backing them, yet can still claim the credits, so the cash goes back into members’ balances.

Two groups miss out. A company can’t have excess credits refunded; it converts them into a tax loss instead. And a foreign resident who owns Australian shares directly gets no refund from the ATO.

Integrity rules stop people buying shares just before a dividend to collect the credit and selling straight after. To claim the offset, you must hold the shares at risk for at least 45 days, or 90 days for certain preference shares, not counting the days you buy and sell. Days on which hedges or options leave you with 30% or less of the normal risk and reward don’t count. The test applies once per purchase, and when you buy the same shares at different times, the last shares bought are treated as the first sold.

A small shareholder exemption switches the holding rule off if your franking credits for the whole year total $5,000 or less, about $11,667 of fully franked dividends from companies taxed at 30%. Above that level, failing the test on a parcel costs all the credits on that parcel. The related payments rule, which denies credits when you pass the dividend’s benefit on to someone else, applies whatever your total.

Say your credits for the year total $6,000, and you buy a parcel 20 days before it goes ex-dividend and sell it 10 days after. You held it for fewer than 45 days, so you report the cash dividend as income but can’t claim that parcel’s credits.

The same franked dividend is worth different amounts to different investors, because the credit is fixed at the company’s rate while the tax is charged at yours. The table below follows a $700 fully franked dividend, $1,000 once grossed up, through each 2026–27 resident rate. Below 30%, the credit exceeds the tax and the difference cuts other tax or comes back as a refund. At 30% the two cancel exactly. Above 30%, you pay a top-up. For most taxpayers, the 2% Medicare levy applies on top of these rates.

This has no close US equivalent. American qualified dividends soften double taxation with lower rates of 0%, 15% or 20% for 2026, but the corporate tax already paid is never credited to the shareholder. In Australia, the credit makes a franked yield worth more than its cash yield: a 4% fully franked cash yield is about 5.7% grossed up. Comparing franked shares with unfranked or overseas shares on cash yield alone therefore understates the franked ones for any Australian-resident investor.

Because credits are worth most where the marginal tax rate is lowest, investors often weigh which account or family member should hold franked shares, a form of asset location.