Franking Credits Explained: How Dividend Imputation Works in Australia

Written by James Wilson

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Last updated: March 31, 2026

Franking Credits: The Tax Benefit Most New Investors Don't Fully Understand

If you've ever received a dividend from an Australian company, you've probably noticed a line on your statement that says something like "franking credit" or "imputation credit". Most people glance at it and move on. But that little number can make a real difference to what you owe (or get back) at tax time.

Franking credits exist to solve a fairness problem. Without them, company profits would be taxed twice: once when the company earns them, and again when they're paid out to you as a dividend. Australia's dividend imputation system fixes that by giving you credit for the tax the company has already paid. Depending on your personal tax rate, you might owe less tax on that dividend, nothing at all, or even get money back from the ATO.

We've put together this guide to explain how the system works, walk through the maths with real numbers, and cover the situations where franking credits help you the most. And the situations where they don't help much at all.

What Are Franking Credits and Why Do They Exist

A franking credit (also called an imputation credit) represents tax that a company has already paid on the profit it's distributing to you as a dividend. The Australian company tax rate is 30% for most large companies (25% for smaller "base rate entities"), so when a company earns $100 in profit and pays $30 in tax, it has $70 left to distribute. The $30 in tax already paid becomes the franking credit attached to your dividend.

The system was introduced in 1987 by the Hawke-Keating government. Before that, company profits really were taxed twice. The company paid tax on its earnings, and then shareholders paid full personal income tax on any dividends received. This effectively discouraged companies from paying dividends and pushed investors towards capital gains instead, which weren't taxed at all at the time.

Australia wasn't the first country to try imputation, but it became one of the most committed to it. New Zealand has a similar system. The UK had one for decades but scrapped it in 1999. Most other major markets, including the US, still use the classical system where dividends are taxed twice, although often at reduced rates.

The logic behind imputation is simple enough: a company is just a legal structure through which people invest and earn returns. Taxing the same profit at the company level and again at the shareholder level penalises people for investing through companies rather than directly. Franking credits remove that penalty by treating the company tax as a prepayment of the shareholder's personal tax obligation.

How Franking Credits Actually Work

Here's the basic flow. A company earns profit. It pays company tax on that profit (let's say 30%). What's left after tax is the pool of money available to pay dividends. When the company pays you a dividend, it can attach franking credits to it, representing the tax already paid.

When you lodge your tax return, you don't just declare the cash dividend you received. You "gross up" the dividend by adding the franking credit back on. This gives you the pre-tax value of the profit. You then pay income tax on that grossed-up amount at your marginal tax rate. But here's the key part: you get to subtract the franking credit from the tax you owe, because that tax has already been paid by the company on your behalf.

If your marginal tax rate is higher than the company tax rate, you pay the difference. If it's the same, you break even. And if your marginal rate is lower than the company tax rate, the excess franking credit is refunded to you as a cash payment from the ATO. That last point is important, and it's what makes the Australian system particularly generous for low-income earners and retirees.

When I first worked through this system properly, the refundable part caught me off guard. In most countries, tax credits can reduce your bill to zero but no further. In Australia, since 2000, excess franking credits are fully refundable. That change was a big deal for self-funded retirees and superannuation funds in the pension phase.

The Maths: A Worked Example

Let's say you own shares in a large Australian company that pays you a fully franked dividend of $700. The company tax rate is 30%. Here's how to work out what that means for your tax.

Step 1: Calculate the franking credit.

The formula is: Franking credit = Dividend amount × (Company tax rate ÷ (1 - Company tax rate))

So: $700 × (0.30 ÷ 0.70) = $700 × 0.4286 = $300

Step 2: Gross up the dividend.

Grossed-up dividend = Cash dividend + Franking credit = $700 + $300 = $1,000

This $1,000 represents the full pre-tax profit the company earned before paying its 30% tax.

Step 3: Calculate tax at your marginal rate.

This is where your personal tax bracket matters. Let's look at three scenarios:

In the first scenario, the investor receives $700 in cash dividends plus a $300 refund from the ATO. That's $1,000 total, which is the full pre-tax company profit. Effectively, zero tax on the dividend. In the high-income scenario, the investor still benefits because they're only paying an extra $150 rather than the $450 they'd owe without the franking credit. The system reduces the tax burden across all brackets.

One thing to keep in mind: the Medicare levy (2%) and Medicare levy surcharge (up to 1.5%) apply on top of your marginal rate. So a taxpayer in the 32.5% bracket is actually paying 34.5% including Medicare. That means they'd owe $345 on the grossed-up $1,000, minus the $300 credit, leaving $45 to pay. Not a lot, but worth knowing.

Fully Franked, Partially Franked and Unfranked Dividends

Not all dividends carry the same level of franking. The amount of franking depends on how much company tax was actually paid on the underlying profit.

Fully franked is what you'll see most often from the big ASX names. If a company is consistently profitable and paying tax in Australia, its dividends are typically fully franked.

Partially franked usually happens when a company earns some of its income overseas (where Australian company tax isn't paid) or has carried forward tax losses that reduce its current tax bill. You'd gross up only the franked portion.

Unfranked dividends are paid from profits that haven't been subject to Australian company tax. Common with companies that earn most of their income offshore, have significant tax losses, or are structured as trusts or stapled securities (like many REITs). An unfranked dividend is taxed at your full marginal rate with no offset.

A real-world example: Woodside Energy typically pays partially franked dividends because a significant chunk of its income comes from overseas operations where foreign tax is paid instead of Australian tax. Meanwhile, Commonwealth Bank's dividends are almost always fully franked because it earns the bulk of its profit in Australia and pays tax here.

When you're comparing dividend yields between companies, the franking status makes a genuine difference to your after-tax return. A 4% fully franked yield is worth more in your pocket than a 4% unfranked yield, sometimes significantly more depending on your tax bracket.

Franking Credits on Your Tax Return

When tax time comes around, you'll need to include both the cash dividend and the franking credit on your return. Your dividend statement (sometimes called a distribution statement) from the share registry will show both amounts. If you use a tax agent or software like myTax, the figures are usually pre-filled from ATO data, but it's worth checking them.

On your tax return, you'll see a section for "Dividends" where you enter the franked amount, the unfranked amount, and the franking credit separately. The ATO then calculates your taxable income including the grossed-up dividend and applies the franking credit as a tax offset.

If you hold shares in multiple companies, you'll have separate dividend statements for each. The franking credits from all your dividends get added together and applied as a single tax offset against your total tax liability.

Something that trips people up: the franking credit increases your taxable income on paper even though you didn't receive that money in cash. This can push you into a higher Medicare levy surcharge bracket or affect income tests for things like the Commonwealth Seniors Health Card. We've seen this catch retirees off guard. If your taxable income (including grossed-up dividends) crosses certain thresholds, it can have knock-on effects beyond just income tax.

Who Benefits Most (and Least) From Franking Credits

The value of franking credits depends entirely on your marginal tax rate relative to the company tax rate. Here's a breakdown using the 2025-26 Australian tax brackets for resident individuals:

Middle-income earners in the 30% bracket roughly break even on franking. They still benefit compared to receiving unfranked dividends, because the credit offsets most of the tax on the dividend income. The Medicare levy means there's a small gap, but it's minor.

Some high-income investors prefer to focus on capital growth rather than dividends, since capital gains held longer than 12 months get a 50% CGT discount. That said, franking credits still reduce the effective tax rate even at the top bracket. They're worth less to high earners, but they're never worth nothing.

Non-residents of Australia generally can't claim franking credits on their Australian tax return. However, fully franked dividends paid to non-residents are exempt from dividend withholding tax, which is a different kind of benefit. Unfranked dividends paid to non-residents are subject to withholding tax (usually 30%, or a lower rate if a tax treaty applies).

Franking Credits and Superannuation Funds

Superannuation funds are where franking credits get really interesting. An SMSF (self-managed super fund) or industry/retail super fund in accumulation phase pays a flat 15% tax rate on income, including dividends. Since the company tax rate is 30%, a fully franked dividend generates a franking credit that's double the super fund's tax liability on that income. The excess is refundable.

Let's run the numbers. A super fund in accumulation phase receives a $700 fully franked dividend. The grossed-up amount is $1,000. Tax at 15% is $150. The franking credit is $300. That leaves a $150 refund. So the fund receives $700 in cash plus $150 back from the ATO, totalling $850 from $1,000 of pre-tax company profit. Effective tax rate: 15%.

For super funds in pension phase (paying retirement income streams), the tax rate on earnings is 0%. That means the entire $300 franking credit comes back as a refund. The fund keeps $700 plus gets $300 back, receiving the full $1,000 of pre-tax profit. Zero effective tax.

This is why Australian shares with high franked dividend yields have been so popular in SMSF portfolios. The combination of franking credits and the concessional super tax rate creates genuinely attractive after-tax returns. It's also why franking credit policy is politically sensitive. Any proposed changes to the refundability of excess franking credits (as was floated before the 2019 federal election) tends to generate strong reactions from retirees and SMSF trustees.

The 45-Day Rule and Other Fine Print

The ATO doesn't just hand out franking credits unconditionally. There are anti-avoidance rules designed to stop people from buying shares right before a dividend, collecting the franking credit, and selling immediately after.

The main one is the 45-day rule (or 90 days for preference shares). To be eligible for the franking credit, you must hold the shares "at risk" for at least 45 days during the period starting 45 days before, and ending 45 days after, the ex-dividend date. "At risk" means you haven't hedged or protected the position in a way that eliminates your economic exposure. So buying shares, hedging them with options, collecting the dividend, and selling doesn't work.

For most retail investors with a normal portfolio of Australian shares, the small shareholder exemption covers them. But if you're receiving significant dividend income, or you actively trade around ex-dividend dates, you need to pay attention to this rule.

Another thing to be aware of: the "dividend washing" rules that came in from 2013. These specifically target buying shares on one market (like the ASX) cum-dividend, selling them ex-dividend, and then buying essentially the same shares on a different market (like Chi-X) that's still trading them cum-dividend. The ATO takes a dim view of schemes designed to multiply franking credits, and the penalties can be serious.

We also want to mention the franking credit trading traps that sometimes pop up on investor forums. The idea of "yield harvesting" by buying high-yield stocks just before the ex-dividend date might sound clever. But the share price typically drops by roughly the dividend amount on the ex-date, so you're not gaining anything on that front. And if you don't meet the 45-day rule, you lose the franking credit entirely. It's one of those strategies that looks better on paper than in practice.

The Bottom Line

Franking credits are one of the genuine advantages of investing in Australian shares. The system is fair in principle, taxing company profits once rather than twice, and in practice it means most Australian investors pay significantly less tax on dividend income than they would in other countries.

If you're a low-income earner or retiree, fully franked dividends can generate actual cash refunds from the ATO. If you're a middle-income earner, they effectively eliminate most of the tax on your dividend income. Even high-income earners benefit, just less dramatically.

The key things to remember: always check whether a dividend is fully franked, partially franked or unfranked before comparing yields. Keep the 45-day rule in mind if you're an active trader or your franking credits exceed $5,000. And if you're running an SMSF, franking credits are probably already a significant part of your investment strategy, whether you've thought about it explicitly or not.

Dividend imputation has been part of the Australian tax system for nearly 40 years now, and for all the political debate it generates, it remains one of the more logical and investor-friendly tax policies in the developed world. Understanding how it works puts you in a better position to make informed decisions about which shares to hold, and how to structure your portfolio for the best after-tax outcome.

Official Sources and Further Reading

• ATO - Refund of Franking Credits for Individuals - the ATO's official guide to franking credit eligibility and how to claim refunds
• ATO - Holding Period Requirement - details on the 45-day rule and when you need to hold shares to qualify for the franking credit
• ASX Investor Information - general information about investing on the ASX including dividend policies