Franking credits — also called imputation credits — are tax credits attached to dividends paid by Australian companies. They represent income tax already paid at the company level, and allow shareholders to offset their own income tax liability. For low-income investors and retirees, franking credits can become direct cash refunds — one of the most powerful tax advantages available to Australian investors.
Why Franking Credits Exist
Without imputation, company profits would be taxed twice: first at the corporate level (30% company tax), then again when shareholders pay income tax on dividends. The Australian dividend imputation system eliminates this double taxation by passing the company tax credit through to shareholders.
How Franking Credits Work — Step by Step
Example: A company earns $1.00 per share profit.
- Company pays 30% corporate tax → $0.30 tax paid
- Company pays $0.70 cash dividend (after-tax profit)
- $0.70 dividend is 100% franked — carrying a $0.30 franking credit
- Shareholder receives $0.70 cash + $0.30 franking credit
- Grossed-up dividend = $1.00 (the full pre-tax profit per share)
When the shareholder files their tax return:
- Include the grossed-up dividend ($1.00) as income
- Calculate tax on $1.00 at their marginal rate
- Subtract the $0.30 franking credit
If tax at their marginal rate is less than $0.30 → the difference is refunded.
Franking Credit Benefit by Tax Rate
| Investor marginal rate | Grossed-up dividend | Tax payable | Franking credit | Net tax outcome |
|---|---|---|---|---|
| 0% (below tax-free threshold) | $1.00 | $0.00 | $0.30 | Refund $0.30 |
| 15% (super accumulation) | $1.00 | $0.15 | $0.30 | Refund $0.15 |
| 19% | $1.00 | $0.19 | $0.30 | Refund $0.11 |
| 30% | $1.00 | $0.30 | $0.30 | Neutral (no tax, no refund) |
| 32.5% | $1.00 | $0.325 | $0.30 | Pay additional $0.025 |
| 47% (top rate) | $1.00 | $0.47 | $0.30 | Pay additional $0.17 |
Key insight: The lower your marginal rate, the more valuable franking credits are. For investors below the 30% tax threshold, franking credits generate a direct cash refund.
Partial Franking
Not all dividends are 100% franked. Some companies have only paid partial corporate tax (e.g., due to offshore operations) and attach fewer franking credits:
- 100% franked: Full $0.30 credit per $0.70 dividend (standard large ASX company)
- 50% franked: $0.15 credit per $0.70 dividend
- 0% franked (unfranked): No franking credit — company paid no Australian corporate tax (common for international operations, REITs/trusts)
Super Funds and Franking Credits
Superannuation funds are the biggest beneficiaries of franking credits:
- Accumulation phase (15% tax): Franking credits reduce tax substantially; excess credits refunded
- Pension phase (0% tax): All franking credits are refunded in cash — a direct return booster
This is why Australian equity allocations in super funds are so powerful — the 0% pension tax plus full franking credit refunds on Australian share dividends produce effectively tax-free grossed-up returns.
Calculating the Grossed-Up Dividend
$$\text{Grossed-Up Dividend} = \text{Cash Dividend} \times \frac{1}{1 - \text{Corporate Tax Rate}}$$
For a 100% franked dividend at 30% corporate tax: $$\text{Grossed-Up Dividend} = $0.70 \times \frac{1}{1 - 0.30} = $0.70 \times 1.4286 = $1.00$$
For a 50% franked dividend: $$\text{Franking Credit} = $0.70 \times \frac{0.30}{0.70} \times 0.50 = $0.15$$
Grossed-Up Dividend Yield
The grossed-up yield accounts for franking credits in the dividend yield calculation:
$$\text{Grossed-Up Yield} = \text{Cash Yield} \times \frac{1}{1 - \text{Corporate Tax Rate}} \times \text{Franking Percentage}$$
Example: VAS dividend yield 4.2%, approximately 80% franked: $$\text{Grossed-Up Yield} \approx 4.2% + (4.2% \times 0.8 \times \frac{0.30}{0.70}) \approx 4.2% + 1.44% = \approx 5.64%$$
For investors who receive franking credit refunds, the grossed-up yield represents the true after-tax return.
How to Claim Franking Credits
Franking credits are claimed through your annual tax return:
- Your broker or share registry provides a dividend statement showing cash dividend and franking credit amount
- Include both in your income tax return (pre-filled data from ATO myTax often includes this automatically)
- The ATO calculates your tax liability, subtracts franking credits, and either reduces your tax bill or sends a refund
See Franking Credit Refund Australia.
Related Articles
- Franking Credit Refund Australia
- Dividend Investing Australia
- High Dividend Shares Australia
- Dividend ETFs Australia
- Income Investing hub
Frequently Asked Questions
Who benefits most from franking credits in Australia? Low-income investors, retirees, and superannuation funds in pension phase benefit most — because the franking credit often exceeds their tax liability, resulting in a cash refund. Higher-income investors (39–47% marginal rate) still benefit from franking credits as a partial tax offset, but don’t receive refunds.
Are franking credits at risk of being removed? There have been political proposals to remove or restrict franking credit refunds (most notably at the 2019 election). As at 2026, the system remains intact. However, policy risk exists — investors should not plan entirely around franking credits continuing indefinitely.
Do international shares have franking credits? No — franking credits are unique to Australian companies that pay Australian corporate tax. Dividends from international shares (e.g., US, European companies) are not franked. This is one reason Australian FIRE investors often hold a significant Australian share allocation.
This article provides general financial information only. For advice tailored to your situation, speak with a licensed financial adviser through the ASIC financial advisers register or MoneySmart.