Understanding Franking Credits in Australia: How They Work and Why They Matter for Investors (2026)

Before dividend imputation was introduced in Australia in 1987, corporate profits were effectively taxed twice. A company earning $100 in profit paid $30 in company tax (at the 30% rate), leaving $70 to distribute as dividends. Shareholders then paid their personal income tax rate on the full $70 dividend - so the same profit was taxed at the company level and again at the personal level.

Dividend imputation eliminated this double taxation. When a company pays Australian company tax on a profit before distributing it as a dividend, the tax already paid is attached to the dividend as a franking credit. Shareholders can then use this credit to offset their own tax liability - effectively paying tax only on the dividend at their marginal rate, with the company tax already paid counting toward that obligation.

An example makes the mechanics clear:

• A company earns $100 in profit and pays $30 in company tax (30% rate), leaving $70 to distribute.
• The company pays a fully franked dividend of $70 and attaches $30 in franking credits - representing the tax already paid.
• You receive $70 cash and a $30 franking credit. Your assessable dividend income is $100 (the gross-up: $70 + $30 credit).
• If your marginal tax rate is 32.5%, your tax on $100 is $32.50. You subtract the $30 franking credit, leaving $2.50 to pay in additional tax.
• If your marginal tax rate is 19% (income $18,201 to $45,000), your tax on $100 is $19. After subtracting the $30 credit, you have an $11 surplus - which is refunded to you as cash.
• If you pay no tax (income below $18,200), the entire $30 franking credit is refundable as cash from the ATO - franking credits can generate a cash refund even if you have no other tax liability.

Not all dividends carry full franking - the franking level depends on the company's Australian tax position:

• Fully franked: The company has paid the maximum Australian company tax on the profits being distributed. The franking credit equals 30/70 of the cash dividend (or 27.5/72.5 for base rate entities paying 25% tax). Most large ASX companies pay fully franked dividends - the big four banks, major retailers, and large industrials.
• Partially franked: Only some of the profits behind the dividend have attracted Australian company tax - common for companies with significant overseas earnings (which are taxed internationally, not generating Australian franking credits). The dividend statement specifies the franking percentage.
• Unfranked: No Australian company tax attached. Common for property trusts (REITs) which pass through rental income rather than distributing taxed corporate profits, and for companies making tax losses.
• How to check: Your dividend statement (received by mail or via your broker's tax report) will show the cash dividend, the franking credit amount, and the franking percentage. The ATO pre-fills your tax return with dividend data reported by companies - verify against your own records.

The tax benefit of franking credits varies significantly depending on your marginal tax rate:

• Low-income earners and retirees in pension phase: The most significant beneficiaries. If your marginal rate is below 30%, you receive the difference back as a cash refund. A retiree with a self-managed super fund in pension phase (zero tax rate) receives every franking credit as a cash refund - a powerful income boost.
• Investors in the 19% tax bracket ($18,201 to $45,000): Receive approximately $11 per $30 of franking credits as a net refund after tax on the grossed-up dividend.
• Investors at the 32.5% rate ($45,001 to $135,000): Pay a small additional amount after applying the franking credit. Still significantly better than receiving the same return as interest (fully taxable) or as a capital gain (taxed at marginal rate less 50% discount if held 12+ months).
• High-income earners (45% rate): Franking credits partially offset the higher marginal tax - the effective tax rate on fully franked dividends is 15 percentage points lower than on unfranked equivalent income at the top marginal rate.
• Super funds in accumulation phase: Taxed at 15% on all earnings including dividends. Fully franked dividends generate a credit refund of 15 cents per dollar of franking credit - a major contributor to super fund returns.

If you lodge your own tax return through myTax, the ATO pre-fills dividend information reported by companies and managed funds. Check the pre-fill against your own dividend statements - discrepancies should be resolved before lodging. Enter the total franking credits in the relevant label (currently Item 11 - Dividends). The ATO system automatically calculates any refund due.

If you hold shares through a managed fund or ETF, the fund distributes its own franking credits to unitholders as part of its annual distribution. Your annual tax statement from the fund will show the franking credit component - include this in your return along with the distribution income.

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