Franking Credits Explained: How Dividend Imputation Works in Australia (2026 Guide)

What Are Franking Credits?

A franking credit represents the income tax that an Australian company has already paid to the ATO on the profits it distributes as dividends. Think of it as a receipt for tax already paid on your behalf.

When a company earns a profit, it pays corporate income tax — either 30% for large companies or 25% for smaller "base rate entities" with aggregated annual turnover under A$50 million. After paying that tax, the company distributes the remaining after-tax profit to shareholders as a dividend. Without the imputation system, shareholders would then pay tax again on that dividend at their own marginal rate. The imputation system prevents that by attaching a franking credit to the dividend, which shareholders can use to offset their personal income tax bill.

The credit is not just a deduction — it is a direct, dollar-for-dollar tax offset. And since 2000, if your franking credits exceed your total tax liability for the year, the ATO refunds the difference as cash. That refundability is what makes franking credits particularly valuable for retirees, low-income earners, and super funds in pension phase.

How the Franking Credit Formula Works

The calculation is straightforward once you understand the logic. The company pays tax at its corporate rate, keeping the after-tax amount to distribute. The grossed-up value of the dividend reconstructs the pre-tax profit that generated it.

Franking Credit = (Cash Dividend ÷ (1 − Corporate Tax Rate)) × Corporate Tax Rate

For a large company paying 30% corporate tax:

• Cash dividend received: A$700
• Franking credit: A$700 ÷ 0.70 × 0.30 = A$300
• Grossed-up dividend: A$1,000

For a small company paying 25% corporate tax:

• Cash dividend received: A$750
• Franking credit: A$750 ÷ 0.75 × 0.25 = A$250
• Grossed-up dividend: A$1,000

In both cases, the grossed-up amount of A$1,000 represents the original pre-tax profit. You include A$1,000 as income in your tax return, then claim the corresponding franking credit as a tax offset. Want to skip the maths? Use CalcPhi's free Franking Credits Calculator to instantly calculate the grossed-up value, tax offset, and after-tax income for any dividend at your marginal rate.

How Franking Credits Affect Your Tax Return

Once you have the grossed-up dividend figure, the tax calculation works in three steps: add the grossed-up dividend (cash dividend + franking credit) to your assessable income; calculate the income tax due on that grossed-up amount at your marginal rate; then deduct the franking credit as a tax offset — if the credit exceeds the tax, you receive a cash refund.

Here is how that plays out across Australia's 2026-27 income tax brackets for a A$700 fully franked dividend from a large company (30% corporate rate):

Marginal Rate	Tax on A$1,000 grossed up	Franking Credit	Net Tax / Refund
0% (below tax-free threshold)	A$0	A$300	A$300 refund
19% (A$18,201–A$45,000)	A$190	A$300	A$110 refund
32.5% (A$45,001–A$135,000)	A$325	A$300	A$25 payable
37% (A$135,001–A$190,000)	A$370	A$300	A$70 payable
47% (above A$190,000 incl. Medicare)	A$470	A$300	A$170 payable

The key insight is the crossover point. At a marginal rate of 30% — exactly equal to the corporate tax rate — the franking credit exactly wipes out the tax on the grossed-up income. Below 30%, you get a refund. Above 30%, you pay the difference. This is how the imputation system achieves its goal: shareholders pay income tax at their own marginal rate, not at the corporate rate, and the company's tax payment simply becomes a prepayment on their behalf.

Fully Franked, Partially Franked, and Unfranked Dividends

Not every dividend carries a full imputation credit. Understanding the difference matters when comparing dividend-paying companies.

Fully Franked

A fully franked dividend means the company has paid the full amount of Australian corporate tax on the profits being distributed. The entire dividend carries a 30% (or 25%) imputation credit. Most major ASX blue chips — Commonwealth Bank, ANZ, NAB, Westpac, Wesfarmers, Woolworths, and Telstra — regularly pay fully franked dividends. These are the most tax-efficient type of dividend for Australian resident shareholders.

Partially Franked

A partially franked dividend carries a franking credit on only a portion of the payment. This commonly occurs when a company earns income from overseas subsidiaries that was taxed in another country rather than in Australia. The offshore profits cannot generate Australian franking credits. For example, a dividend described as "70% franked" means 70% of it carries the full imputation credit, while the remaining 30% is unfranked and fully taxed at your marginal rate.

Unfranked

An unfranked dividend carries no imputation credit at all. This happens when a company has paid no Australian corporate tax — for example, because it has accumulated tax losses that offset its profits, or because its income is generated entirely offshore. You still receive the cash dividend, but it is taxed entirely at your own marginal rate with no offset. Many foreign companies listed on the ASX pay unfranked dividends for this reason.

Franking Credits and Superannuation Funds

Franking credits are particularly powerful inside superannuation, which is why Australian retirees often structure their portfolios heavily around fully franked ASX shares.

Accumulation Phase (15% Tax Rate)

Superannuation funds in accumulation phase pay 15% tax on investment income, including dividends. A 30% franking credit attached to a dividend is double the fund's own tax rate, meaning the fund will almost always have excess credits. These excess credits reduce the fund's overall tax bill on other income, or generate a refund. The effective after-tax yield on a fully franked dividend inside a super fund in accumulation is significantly higher than the cash dividend alone suggests.

Pension Phase (0% Tax Rate)

This is where franking credits become truly remarkable. A super fund paying members an account-based pension pays zero tax on investment income. Every dollar of franking credit received on pension-phase investments is therefore fully refundable. If a pension-phase SMSF holds a portfolio generating A$70,000 in fully franked dividends in a year, it will receive A$30,000 in cash refunds from the ATO — on top of the A$70,000 cash dividends — effectively boosting total income to A$100,000 with no tax paid. For SMSF strategy and projections, see our SMSF guide for Australian investors.

The Franking Account: How Companies Track Credits

Behind the scenes, every Australian company that pays tax maintains a "franking account" — essentially a running ledger of the imputation credits available to distribute to shareholders. When the company pays corporate income tax to the ATO, its franking account is credited. When it pays a franked dividend, the account is debited by the credits attached to that dividend.

A company cannot distribute more franking credits than it has in its franking account. If it attempts to do so — called "over-franking" — it faces a penalty tax. Equally, a company can choose to pay an unfranked dividend if it has available cash but no credits in its franking account.

For investors, this means that a company's ability to pay fully franked dividends over time depends on how consistently it pays Australian corporate tax. Growth companies that rely heavily on deferred tax losses or offshore income structures may pay lower-franked dividends even if their cash dividends appear generous.

The 45-Day Holding Rule: What You Need to Know

The ATO introduced the 45-day rule to prevent a practice called "dividend stripping" — where investors buy shares just before a dividend, collect the franking credit, and immediately sell. The rule requires that you must hold shares "at risk" for at least 45 continuous days (not counting the purchase or sale date) to be eligible to claim the attached franking credits. For preference shares and some other instruments, the holding period extends to 90 days.

Importantly, you must hold the shares "at risk" — meaning you cannot hedge the position with derivatives or options that effectively eliminate your exposure to price movements. Simply holding the shares in your brokerage account while protecting your downside with put options does not satisfy the rule.

There is a significant small investor exemption: if your total franking credit entitlement for the year is A$5,000 or less, the 45-day rule does not apply to you. Most individual investors holding blue-chip ASX shares for income will comfortably qualify for this exemption.

Grossed-Up Dividend Yield: The Real Return on Franked Shares

One of the most useful concepts for comparing dividend-paying shares is the "grossed-up yield" — the dividend yield adjusted to include the value of franking credits. This lets you compare franked and unfranked dividends on an equal basis.

Grossed-Up Yield = Cash Dividend Yield ÷ (1 − Corporate Tax Rate)

If CBA pays a 4.5% fully franked dividend yield: Grossed-Up Yield = 4.5% ÷ 0.70 = 6.43%. That 6.43% is the pre-tax equivalent return, assuming you can fully utilise the franking credit. For a retiree with a 0% marginal rate, the actual after-tax yield is 6.43%. For someone on a 32.5% marginal rate, the after-tax return is approximately 4.39% after the small top-up tax.

This is why Australian shares are frequently cited as having among the highest after-tax dividend yields in the world for domestic investors — the grossed-up yield significantly exceeds the face cash yield. Never compare an unfranked yield directly against a fully franked yield without adjusting for the tax benefit: a 5% unfranked dividend and a 4.5% fully franked dividend are not equivalent.

Worked Example: Three Investors, Same Dividend, Different Outcomes

Here is how the same A$700 fully franked dividend from a large ASX company (30% corporate rate, A$300 franking credit, A$1,000 grossed-up) produces completely different results for three investors.

Investor A — Retiree on age pension, 0% marginal rate

Tax on A$1,000: A$0. Franking credit offset: A$300. ATO refund: A$300. Total cash received: A$700 dividend + A$300 refund = A$1,000. Effective tax rate on dividend: 0%.

Investor B — Salaried professional earning A$90,000, 32.5% marginal rate

Tax on A$1,000: A$325. Franking credit offset: A$300. Net additional tax payable: A$25. Total cash after tax: A$700 − A$25 = A$675. Effective tax rate on dividend income: 2.5%.

Investor C — High-income earner, 47% marginal rate (including Medicare levy)

Tax on A$1,000: A$470. Franking credit offset: A$300. Net additional tax payable: A$170. Total cash after tax: A$700 − A$170 = A$530. Effective tax rate on dividend income: 17% — far less than the 47% marginal rate that applies to other types of income.

Use CalcPhi's Franking Credits Calculator to run these numbers for your own dividends — enter your cash dividend, franking percentage, and marginal rate for your exact tax position, refund, or payment due.

How to Report Franking Credits on Your Tax Return

The ATO pre-fills most dividend and franking credit data in myTax for shares held through major registries (Computershare, Link Market Services). However, you should always verify the figures against your own records. Your broker or share registry will provide an Annual Tax Statement at the end of the financial year (30 June) listing every dividend received, the cash amount, the franking percentage, and the franking credit value.

In your tax return: include the cash dividend amount and the franking credit amount separately in the dividends section; the combined total (grossed-up dividend) is added to your assessable income; claim the franking credit as a tax offset in the tax offsets section; if your total franking credits exceed your tax payable, the ATO automatically calculates the refund — you do not need to claim it separately.

For investors holding shares through a managed fund or ETF, the fund provides an annual "attribution managed investment trust (AMIT) statement" summarising your share of dividends, franking credits, and capital gains distributions. Use CalcPhi's Income Tax Calculator to model how adding franked dividend income affects your overall tax position for the year.

Franking Credits Strategy: Getting the Most from Your Dividends

Reinvest dividends during high-income years, take cash during low-income years

If your income fluctuates year to year — for example, you are a contractor, self-employed, or approaching retirement — the value of franking credit refunds increases when your marginal rate is low. In years when your income is below A$18,200, you receive the entire franking credit back as a cash refund. Timing major share purchases or transitioning to pension phase to align with low-income years can significantly boost the effective value of your franking credits.

Hold high-franking shares inside super

The tax benefit from franking credits is multiplied inside a low-tax or zero-tax environment. Pension-phase super funds receive full cash refunds. Keeping your highest-yielding fully franked positions inside super — while holding international shares or growth assets in your personal name where franking credits provide less benefit — is a simple structural optimisation that many investors overlook.

Compare grossed-up yields when selecting shares

Never compare an unfranked yield directly against a fully franked yield without adjusting for the tax benefit. Use CalcPhi's Investment Returns Calculator to compare the total return — including dividends, franking credits, and capital growth — across different ASX investment scenarios.

Frequently Asked Questions

• Can I get a cash refund from the ATO for unused franking credits?

  Yes. Since July 2000, Australia's imputation system has been fully refundable. If the total franking credits you receive in a financial year exceed your income tax liability, the ATO refunds the excess as cash — directly into your bank account after you lodge your tax return. This applies to individual taxpayers, superannuation funds (including SMSFs), and certain trusts. Australian companies cannot receive cash refunds — they can only carry unused franking credits forward in their own franking account.

• Do franking credits apply to shares held through ETFs or managed funds?

  Yes, but the mechanism is slightly different. When an ETF or managed fund distributes income that includes franked dividends, it passes the franking credits through to investors as part of the annual distribution. Your annual tax statement from the fund will show the cash distribution and the franking credit component separately. You include both in your tax return and claim the credits as an offset, exactly as you would for shares held directly. Not all ETF income carries franking credits — international ETFs will typically not pass on any imputation credits.

• What happens to franking credits if I sell shares before holding them for 45 days?

  If you sell shares within 45 days of purchase (not counting the purchase or sale date), you lose the right to claim the franking credits attached to any dividend received during that period — unless your total franking credit entitlement for the year is A$5,000 or less, in which case the 45-day rule exemption applies. If you are caught by the rule and have already included the credits in your return, the ATO will disallow them. For most long-term buy-and-hold investors, this rule is not a concern.

• Are franking credits valuable for high-income earners?

  Yes, but less so than for lower-income investors. High-income earners still benefit because the franking credit directly offsets part of the tax they owe on the grossed-up dividend. For example, someone on a 47% marginal rate pays just 17% effective tax on a fully franked dividend rather than 47% — the credit covers 30 percentage points of their liability. The mathematical benefit is real; it is simply smaller in absolute terms than the cash refund a zero-tax investor receives.

• What is the difference between the 30% and 25% franking rates?

  The franking rate reflects the corporate tax rate the distributing company actually paid. Large companies with annual aggregated turnover of A$50 million or more pay 30% corporate tax and can attach 30% franking credits. Smaller base rate entities pay a reduced rate of 25% and can only attach credits at 25%. If you receive a dividend from a smaller ASX company, check whether it pays 25% or 30% corporate tax — the franking credit attached will differ accordingly, and the grossed-up calculation changes.

• How do I find the franking credit amount on my dividend statement?

  Every dividend statement or confirmation you receive from a share registry (such as Computershare or Link Market Services) will include a line specifically showing the franking credit amount. Your annual broker tax statement or CHESS holding statement will also summarise all dividends and franking credits received in the financial year. For myTax users, the ATO pre-fills most of this data from share registry reports — but always cross-check the prefilled figures against your own records before submitting, particularly if you have traded shares during the year or hold smaller company shares.