Franking credits explained

Franking credits are one of the most valuable features of the Australian tax system for share investors. They prevent dividends from being taxed twice (once at the company level and again in the shareholder's hands) and can even result in a tax refund for low-income earners. Despite their importance, many investors do not fully understand how they work.

This guide explains what franking credits are, how to calculate the tax on franked dividends, and how they apply in different situations including SMSFs.

Disclaimer: This article is for informational purposes only and does not constitute financial or tax advice. Consult a qualified tax professional for advice specific to your circumstances.

What are franking credits?

When an Australian company earns a profit, it pays company tax at the corporate tax rate (currently 30% for most listed companies, or 25% for base rate entities with turnover under $50 million). When the company then distributes some of that profit to shareholders as a dividend, the dividend comes from profits that have already been taxed.

Franking credits (also called imputation credits) represent the tax the company has already paid on the profits being distributed. They are attached to the dividend to ensure shareholders are not taxed twice on the same income.

The system works like this: instead of just including the cash dividend in your assessable income, you "gross up" the dividend by adding the franking credit. You then calculate tax on the grossed-up amount and receive a tax offset equal to the franking credit. If the offset exceeds your tax liability, you receive the excess as a refund.

Types of dividends

Fully franked dividends

A fully franked dividend means the company has paid company tax on the entire amount being distributed. The franking credit equals the maximum possible amount based on the corporate tax rate.

For a company taxed at 30%, a fully franked dividend of $70 carries a franking credit of $30. The grossed-up dividend (also called the "pre-tax equivalent") is $100. This makes sense: the company earned $100, paid $30 in tax, and distributed the remaining $70 to you with a $30 credit.

Partially franked dividends

A partially franked dividend means the company has only paid tax on part of the distributed amount. This can happen when a company has a mix of taxed and untaxed income (for example, income earned overseas where foreign tax was paid instead of Australian company tax).

A 50% franked dividend of $70 from a company taxed at 30% would carry a franking credit of $15 (half of the $30 full credit).

Unfranked dividends

An unfranked dividend carries no franking credits at all. The company has not paid Australian company tax on the distributed amount. This is common for companies that earn most of their income overseas. You include the full dividend amount in your assessable income with no franking credit offset.

How to calculate tax on franked dividends

Here is the formula:

1. Start with the cash dividend received
2. Add the franking credit to get the grossed-up dividend
3. Include the grossed-up dividend in your assessable income
4. Calculate tax on your total income at your marginal rate
5. Subtract the franking credit as a tax offset

The franking credit formula for a fully franked dividend is:

Franking credit = Cash dividend x (Company tax rate / (1 - Company tax rate))

For a company taxed at 30%:

Franking credit = Cash dividend x (0.30 / 0.70) = Cash dividend x 0.4286

Worked example: fully franked dividend

Let's say you receive a fully franked dividend of $1,400 from a company taxed at 30%, and your marginal tax rate is 30% (plus 2% Medicare levy, so 32% effective rate).

Step 1: Calculate the franking credit

Franking credit = $1,400 x (30 / 70) = $600

Step 2: Calculate the grossed-up dividend

Grossed-up dividend = $1,400 + $600 = $2,000

This $2,000 represents the pre-tax profit the company earned before paying company tax.

Step 3: Calculate tax on the grossed-up amount

Tax at 32%: $2,000 x 32% = $640

Step 4: Subtract the franking credit

Tax payable = $640 - $600 = $40

So on a $1,400 cash dividend, you pay just $40 in additional tax. Your effective tax rate on the dividend is $40 / $1,400 = 2.9%, much lower than your marginal rate of 32%.

Without the franking credit system, you would pay $448 in tax on the $1,400 dividend (32% of $1,400). The franking credit saves you $408.

Comparison at different tax rates

Here is how the same $1,400 fully franked dividend (with $600 franking credit) is taxed across different marginal rates:

For taxpayers on the top marginal rate, franking credits still provide a substantial benefit, reducing the effective tax rate on dividends from 47% to 24.3%.

Franking credit refunds for low-income earners

One of the most significant features of Australia's imputation system is that excess franking credits are refundable. If your total tax liability is less than the franking credits you have received, the ATO pays you the difference as a cash refund.

This is particularly relevant for:

• Retirees with low taxable income who hold dividend-paying shares
• Part-time workers earning below the tax-free threshold
• Students or other low-income earners with share investments

In the table above, a taxpayer earning under $18,200 would receive a $600 cash refund from the ATO on that $1,400 dividend. They receive the dividend plus additional cash from the refund.

For more on how dividends interact with your overall tax position, see our guide on how much tax you pay on shares in Australia.

Franking credits in SMSFs

Self-managed super funds (SMSFs) benefit significantly from franking credits, particularly in the pension phase.

Accumulation phase

SMSFs in the accumulation phase pay a tax rate of 15% on assessable income. On a fully franked dividend:

• Grossed-up dividend: $2,000
• Tax at 15%: $300
• Less franking credit: -$600
• Refund: $300

The SMSF effectively receives the $1,400 dividend plus a $300 refund, for a total of $1,700 on $2,000 of pre-tax company profits.

Pension phase

SMSFs paying pensions to retired members have a 0% tax rate on earnings. This means the entire franking credit is refunded:

• Grossed-up dividend: $2,000
• Tax at 0%: $0
• Less franking credit: -$600
• Refund: $600

The SMSF receives $1,400 in dividends plus $600 in franking credit refunds, effectively receiving the full $2,000 of pre-tax profit. This is why Australian dividend-paying shares are so popular in SMSF portfolios.

For more on managing your SMSF portfolio, see our guide on tracking your SMSF share portfolio.

The 45-day holding period rule

To claim franking credits, you generally need to hold the shares "at risk" for at least 45 days (or 90 days for preference shares) during the period beginning 45 days before and ending 45 days after the ex-dividend date. This is the "holding period rule."

The rule is designed to prevent investors from buying shares just before the ex-dividend date, collecting the franked dividend, and then selling (a practice known as "dividend stripping").

There is a small shareholder exemption: if your total franking credit entitlement for the income year is $5,000 or less, the holding period rule does not apply. Most individual investors with modest portfolios will fall under this exemption.

How to track franking credits

Tracking franking credits accurately is important for your tax return. You need to record:

• The gross dividend amount for each payment
• The franking percentage (fully franked, partially franked, or unfranked)
• The franking credit amount
• The payment date (which determines the financial year it falls into)

Dividend statements from your share registry (such as Computershare or Link Market Services) provide this information. The ATO also pre-fills franking credit data in your tax return from reports submitted by these registries, but you should verify the figures against your own records.

You can learn more about recording and reviewing dividend payments in our guide to tracking dividends and planning your income using the dividend calendar. If you want to estimate how much dividend income a stock would generate before buying, the dividend calculator lets you model different share quantities using actual dividend data.

Track your franking credits with TrackMyShares

TrackMyShares lets you record dividend transactions including the franking credit amount for each payment. You can see your total dividend income and franking credits across your portfolio, broken down by holding and by financial year. This makes it straightforward to complete your tax return and verify the pre-filled amounts from the ATO.

For SMSF investors, you can create a separate portfolio for your fund's holdings and track dividends, franking credits, and capital gains independently from your personal investments. Tax reports support the super fund CGT discount (33.33%), so your EOFY reporting reflects the correct rates.

Start tracking your dividends with TrackMyShares