Franking Credits Explained: How Dividend Imputation Works in Australia
Australia's dividend imputation system is one of the most investor-friendly tax structures in the world. When an Australian company pays tax on its profits and then distributes those profits as dividends, it would be unfair to tax the same money again in the hands of shareholders. Franking credits — also called imputation credits — represent the tax already paid by the company, and shareholders can use them to offset their own tax liability. For many Australian investors, particularly retirees and self-managed super fund members, franking credits represent thousands of dollars in annual tax savings or even cash refunds.
How the Imputation System Works
Australian companies pay corporate income tax at either 30% (large companies) or 25% (base rate entities with aggregated turnover under $50 million). When a company pays a fully franked dividend, it attaches franking credits equal to the corporate tax already paid on those profits.
The franking credit formula is: Franking Credit = (Dividend ÷ (1 − Corporate Tax Rate)) × Corporate Tax Rate
For a large company paying 30% tax: a $700 cash dividend carries $300 in franking credits, giving a grossed-up dividend of $1,000. For a small company paying 25% tax: a $750 cash dividend carries $250 in franking credits, grossed-up value $1,000.
| Cash Dividend | Tax Rate | Franking Credit | Grossed-Up Value |
|---|---|---|---|
| $700 | 30% | $300 | $1,000 |
| $750 | 25% | $250 | $1,000 |
| $350 | 30% | $150 | $500 |
| $500 | 30% (50% franked) | $150 | $650 |
How Franking Credits Affect Your Tax Return
When you receive a franked dividend, you include the grossed-up amount (cash dividend + franking credit) in your assessable income, then claim the franking credit as a tax offset against your income tax liability.
Example: You receive a $700 fully franked dividend from a large company (30% rate). You include $1,000 in your tax return as income. At a 39% marginal rate, tax on $1,000 = $390. You deduct the $300 franking credit. Net tax to pay: $90.
At a 19% marginal rate: tax on $1,000 = $190. Franking credit: $300. The credit exceeds the tax — you receive a $110 cash refund. This refundability for lower-income investors and super funds is what makes franking credits so powerful.
| Marginal Rate | Tax on $1,000 | Franking Credit | Net Tax / Refund |
|---|---|---|---|
| 0% (tax-free threshold) | $0 | $300 | $300 refund |
| 19% | $190 | $300 | $110 refund |
| 32.5% | $325 | $300 | $25 payable |
| 39% | $390 | $300 | $90 payable |
| 47% | $470 | $300 | $170 payable |
For investors in a 0% tax environment — such as super funds in pension phase or individuals below the tax-free threshold — fully franked dividends generate cash refunds from the ATO. This is why dividend-paying Australian shares are particularly popular inside self-managed super funds.
Fully Franked vs Partially Franked vs Unfranked
Fully franked: The company has paid the maximum amount of Australian corporate tax on the profits distributed. The full 30% (or 25%) imputation credit is attached. Most major ASX companies — the big banks, Wesfarmers, BHP, Woodside — pay fully franked dividends.
Partially franked: The company has paid Australian corporate tax on only part of the profits. This happens when a company has offshore income that was taxed in another country and not subject to Australian corporate tax. The franking percentage (e.g., 60% franked) indicates the proportion of the dividend that carries imputation credits.
Unfranked: No Australian corporate tax was paid on the profits distributed. International companies listed on the ASX (e.g., dual-listed miners), or companies that have used tax losses to reduce their corporate tax to zero, often pay unfranked dividends. These are taxed entirely at your marginal rate with no offset.
Franking Credits in Super Funds
Superannuation funds in accumulation phase pay tax at 15% on income. A fully franked dividend produces a 30% franking credit — more than double the fund's tax rate. The excess credits reduce other income tax within the fund or generate a refund. This makes fully franked ASX shares among the most tax-efficient assets inside super.
In pension phase, the fund pays 0% tax on investment income. Every dollar of franking credit attached to pension-phase dividends becomes a direct cash refund to the fund. A retirement-phase SMSF receiving $50,000 in fully franked dividends (grossed-up value $71,429) would receive a $21,429 cash refund from the ATO annually.
This is why many retirees with SMSFs hold large positions in the Commonwealth Bank, ANZ, NAB, Westpac, and Wesfarmers — these companies consistently pay high fully franked dividends. See our guide to SMSF investing for the full picture.
The 45-Day Rule
To prevent taxpayers from briefly buying shares, harvesting franking credits, and immediately selling (dividend stripping), the ATO imposes the 45-day rule. To claim franking credits, you must have held the shares at risk for at least 45 days (90 days for preference shares) — not counting the purchase or sale date. Small investors with total franking credits under $5,000 are exempt from this rule.
Frequently Asked Questions
- Can I receive a cash refund for unused franking credits?
- Yes. If your franking credits exceed your income tax liability for the year, the ATO refunds the difference as cash. This applies to individual taxpayers, super funds, and some other entities. Companies cannot receive cash refunds — they can only carry unused credits forward.
- Do foreign shares have franking credits?
- No. Franking credits only arise from Australian corporate tax paid by Australian companies. Dividends from overseas companies — whether received directly or through funds — are fully taxable at your marginal rate with no imputation credit. This is one reason Australian investors tend to overweight domestic shares relative to global benchmarks.
- How do I find the franking credit amount on my dividend statement?
- Your dividend statement will show the cash dividend amount, the franking percentage, and the franking credit amount separately. Your annual tax statement from your broker or share registry will summarise all dividends and franking credits received during the financial year. Enter these amounts directly into your tax return or provide them to your tax agent.
