How Franking Credits Affect Your Tax Return in Australia

By Peakifi Editorial Team · Updated May 2026

This article provides general information only and does not constitute financial advice. For advice tailored to your situation, consult a licensed financial adviser. Learn more.

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Franking credits — also called imputation credits — are tax credits attached to dividends paid by Australian companies. They represent the corporate tax the company has already paid on the profits it is distributing to shareholders. The Australian imputation system ensures company profits are taxed only once — at the company level — and that shareholders receive credit for the tax already paid. If the credit exceeds your personal tax liability on the dividend, the ATO refunds the excess.

Why Franking Credits Exist — The Imputation System

Before dividend imputation was introduced in Australia in 1987, company profits were effectively taxed twice: once at the corporate level (company tax) and again when shareholders paid income tax on their dividends. Imputation removed this double taxation by allowing companies to “frank” their dividends — attaching a credit for the corporate tax already paid.

Without imputation: Company earns $1,000 → pays 30% tax ($300) → distributes $700 dividend → shareholder pays income tax on $700 → profit taxed twice

With imputation: Company earns $1,000 → pays 30% tax ($300) → distributes $700 + $300 franking credit → shareholder pays income tax on $1,000 total → receives $300 credit → net tax reflects personal marginal rate only

How Franking Credits Work — Step by Step

Step 1 — Company Pays Corporate Tax

When a company earns a profit and pays Australian corporate tax, those tax payments go into a franking account — a running balance the company maintains to track how much tax has been paid.

Step 2 — Company Declares a Franked Dividend

When distributing profits as a dividend, the company decides the franking percentage (0% to 100%). A fully franked dividend means the full tax credit is passed to shareholders. A 50% franked dividend passes half.

Step 3 — Shareholder Receives Grossed-Up Income

You receive:

The cash dividend (what hits your bank account)
The franking credit (a tax credit, not cash — but it reduces your tax bill)

Both amounts are included in your assessable income:

$$\text{Assessable income from dividend} = \text{Cash dividend} + \text{Franking credit}$$

The franking credit for a fully franked dividend is calculated as:

$$\text{Franking credit} = \text{Cash dividend} \times \frac{\text{Company tax rate}}{1 - \text{Company tax rate}}$$

For a 30% company tax rate: franking credit = cash dividend × 30/70 = cash dividend × 0.4286

Step 4 — Credit Offsets Your Tax

The franking credit directly offsets the tax you owe on the grossed-up dividend:

$$\text{Net tax} = (\text{Assessable income} \times \text{Marginal rate}) - \text{Franking credit}$$

Franking Credits — Tax Outcomes by Marginal Rate

The beauty of the system is that each investor pays tax at their own marginal rate — not the company rate:

Marginal rate (incl. Medicare)	Tax on $1,000 grossed-up dividend	Less $300 credit	Net outcome
0% (below tax-free threshold)	$0	−$300	$300 refund
19%	$190	−$300	$110 refund
34.5%	$345	−$300	$45 tax payable
39%	$390	−$300	$90 tax payable
47%	$470	−$300	$170 tax payable

Low-income earners and retirees receive a cash refund from the ATO for excess franking credits. High-income earners still owe some additional tax — but significantly less than if the dividend were unfranked.

Refundability of Excess Credits

Since July 2000, excess franking credits have been fully refundable to individuals (including those with no tax liability at all). This is a significant benefit for:

Retirees with income below the tax-free threshold
SMSFs in pension phase (where the tax rate is 0%)
Low-income investors whose marginal rate is below 30%

Prior to 2000, unused franking credits could only be used to reduce tax — not refunded. The 2019 federal election featured a proposal to end refundability (which was ultimately not enacted).

Franking Account and Franking Deficit Tax

Companies must maintain a franking account to track available credits. If a company over-franks dividends (pays out more franking credits than it has available in its franking account), it incurs a franking deficit tax — a penalty to recover the over-credited amount.

Holding Period Rule

To claim a franking credit, you must hold the shares “at risk” for at least 45 days (90 days for preference shares) around the dividend record date. This prevents investors from buying shares just before a dividend record date to capture the franking credit and selling immediately after (known as “dividend stripping”). The 45-day rule ensures only genuine shareholders access the imputation benefit.

Frequently Asked Questions

Can I claim franking credits on shares held in my super fund? Yes. SMSFs in accumulation phase pay 15% tax on investment income, including dividends. Franking credits offset this 15% liability — and if credits exceed it, the excess is refunded to the fund. SMSFs in pension phase (0% tax rate) receive full refunds of all franking credits.

Do ETFs pass on franking credits? Yes. Australian equity ETFs (like Vanguard’s VAS or Betashares’ A200) hold Australian shares and pass through the franking credits embedded in the dividends they receive. The franking credits appear on the ETF’s distribution statement each year.

What is a franking credit ratio? Some companies do not fully frank their dividends — particularly those with significant offshore income that has not attracted Australian corporate tax. The franking ratio (or franking percentage) tells you what proportion of the dividend is franked. A 70% franked dividend means 70% of the dividend carries a tax credit, and 30% is unfranked income.

This article provides general tax information. For advice tailored to your situation, speak with a registered tax agent. Find one through the Tax Practitioners Board register.