Franking credits — also called imputation credits — are credits attached to Australian company dividends that represent company tax already paid by the Australian company on the profits it distributes. Australia’s dividend imputation system was introduced in 1987 to prevent company profits from being taxed twice: once at the company level (at the 30% corporate tax rate) and again in the shareholder’s hands. Franking credits allow shareholders to offset the company tax already paid against their personal income tax obligation.
The Problem Franking Credits Solve
Without imputation, company profits are taxed at the 30% corporate rate, then the after-tax profit is distributed as a dividend and taxed again in the shareholder’s hands at their personal marginal rate. This double taxation was considered inequitable.
The imputation system solves this by “imputing” the company tax to the shareholder. The shareholder includes the grossed-up dividend in their income (to represent the pre-tax profit) but receives a credit for the company tax already paid.
How Franking Credits Work — Step by Step
Example: A company earns $100 in profit, pays 30% corporate tax ($30), and distributes the remaining $70 as a dividend.
| Step | Amount |
|---|---|
| Company profit | $100 |
| Corporate tax paid (30%) | −$30 |
| Cash dividend to shareholder | $70 |
| Franking credit attached | $30 |
| Grossed-up dividend (income included in tax return) | $100 |
| Tax at 34.5% marginal rate (32.5% + 2% Medicare levy) | $34.50 |
| Less franking credit | −$30.00 |
| Additional tax to pay | $4.50 |
If the shareholder’s marginal rate is lower than the 30% company tax rate, they receive a refund of the excess franking credit:
Example — Lower marginal rate (19%):
| Step | Amount |
|---|---|
| Grossed-up dividend (in income) | $100 |
| Tax at 21% (19% + 2% Medicare levy) | $21 |
| Less franking credit | −$30 |
| Refund | $9 |
Fully Franked vs Partially Franked vs Unfranked
Dividends are described by their franking percentage:
| Type | Meaning |
|---|---|
| Fully franked (100%) | Company paid full 30% tax on the underlying profit |
| Partially franked | Company paid less than 30% tax — credit is proportionally smaller |
| Unfranked (0%) | No Australian company tax paid on this profit — no credit |
Dividends from companies that have overseas income, tax losses, or other concessions may be only partially franked or unfranked.
Small Company Tax Rate and Franking
Small base-rate entities (companies with aggregated turnover under $50M) pay a corporate tax rate of 25% (FY2024–25). Dividends from these companies are franked at 25%, not 30%. The franking credit calculation uses the lower rate:
$$\text{Franking credit} = \text{Cash dividend} \times \frac{25}{75} = \text{Cash dividend} \times 0.333…$$
For a $75 cash dividend from a small company: Franking credit = $75 × (25/75) = $25.
Refundability of Franking Credits
Since 2000, franking credits have been fully refundable to Australian resident taxpayers. This means that if your franking credits exceed your tax liability (including the Medicare levy), the excess is refunded as a cash payment.
This is particularly beneficial for:
- Self-funded retirees on low or zero taxable incomes (e.g., drawing only a tax-free super pension)
- Low-income earners whose marginal rate is below the corporate tax rate
- Superannuation funds in pension phase (which are tax-exempt) — SMSFs in pension phase may receive full cash refunds of franking credits
The 45-Day Holding Rule
To claim a franking credit on a dividend, you must have held the shares at risk for at least 45 days (90 days for preference shares) during the period beginning the day after acquisition and ending 45 days after the ex-dividend date. The at-risk holding period excludes days when your exposure to risk is substantially reduced through hedging.
The 45-day rule prevents short-term dividend stripping — buying shares just before the dividend, collecting the franking credit, then selling.
Related Articles
- How to Claim Franking Credits in Your Tax Return
- Dividend Tax in Australia — A Complete Guide
- ETF Tax in Australia — AMMA Statements and Distributions
- Tax Offsets hub
- Taxes hub
Frequently Asked Questions
Can I claim franking credits if I only hold shares in a managed fund or ETF? Yes. Managed funds and ETFs that hold Australian shares can pass franking credits through to investors. The amount of franking credits you receive is shown on your annual statement (AMMA statement for ETFs). You claim these credits on your tax return the same way as direct share dividends.
Do franking credits apply to international shares? No. Franking credits only attach to dividends from Australian companies that have paid Australian corporate tax. Dividends from overseas companies do not carry Australian franking credits (though foreign tax credits may apply in some cases for foreign tax paid).
What happens to franking credits in a self-managed super fund (SMSF)? SMSFs in accumulation phase pay 15% tax on their income. Franking credits can offset this tax, and if they exceed it, the excess is refunded. SMSFs in full pension phase (0% tax) receive a full cash refund of all franking credits received.
This article provides general tax information only. For advice tailored to your situation, speak with a registered tax agent or financial adviser. Find one through the Tax Practitioners Board register or visit MoneySmart.