Franking credits are a uniquely Australian tax perk that can put real dollars back in your pocket—if you know how to use them. Whether you’re an investor, retiree, or just curious about how dividends and tax interact in 2025, understanding franking credits could be the key to unlocking extra income.
What Are Franking Credits and How Do They Work?
When Australian companies pay dividends to shareholders, those dividends often come with a tax credit attached—known as a franking credit. This system, introduced in 1987 and updated several times since, is designed to prevent ‘double taxation’ on company profits.
- Company earns profit and pays corporate tax (currently 30% for large companies, 25% for base rate entities in 2025).
- Company distributes dividends to shareholders, attaching a franking credit that reflects the tax already paid.
- Shareholders report dividends and franking credits in their tax return, and use the credits to offset their own tax bill.
In essence, you’re credited for the tax the company already paid, so you’re only taxed at your marginal rate. If your tax rate is lower than the company rate, you may even get a cash refund.
2025 Policy Updates: What’s Changed for Franking Credits?
The 2025 financial year has brought some important developments around franking credits:
- Base rate entity threshold for the 25% company tax rate remains at $50 million aggregated turnover.
- No changes to refundability: Individuals and super funds can still claim franking credit refunds if their credits exceed their tax liability—a hot topic in past elections, but untouched in the 2025 Federal Budget.
- ATO compliance focus: The ATO has flagged increased scrutiny on ‘dividend washing’ and schemes designed to artificially maximise franking credits. Investors should ensure their strategies comply with anti-avoidance rules.
Most companies continue to offer fully or partially franked dividends, particularly in sectors like banking, resources, and utilities.
Real-World Examples: Who Benefits Most from Franking Credits?
The impact of franking credits can be substantial—especially for retirees, SMSFs, and low-to-middle income investors. Here’s how it plays out in practice:
- Retirees and SMSFs: A self-funded retiree in pension phase (tax-free) who receives $10,000 in fully franked dividends could receive an additional $4,286 refund from the ATO, thanks to the attached franking credits.
- Working Australians: A taxpayer on a 32.5% marginal rate would use the franking credit to reduce their tax on dividends from 32.5% down to 0%, and only pay the difference if their marginal rate is above the company tax rate.
- High-income investors: If your marginal tax rate is higher than 30%, you’ll pay a bit more tax on the dividend, but the credit still offsets much of your liability.
Let’s say you own shares in a major bank that pays a fully franked dividend of $700. The accompanying franking credit is $300 (assuming a 30% company tax rate). You declare both amounts ($1,000 total) as income, but you get a $300 tax offset. If your personal tax bill is less than $300, you’ll get the difference back as a refund.
Strategies to Maximise Franking Credits in 2025
If you’re looking to get the most out of franking credits this year, consider these tactics:
- Dividend-focused investing: Target ASX-listed companies with a strong history of fully franked dividends. Banks, resource giants, and some infrastructure stocks are reliable sources.
- Utilise tax-free entities: Holding franked shares in your SMSF (in pension phase) or as a low-tax individual can magnify the benefits, as excess credits become tax refunds.
- Beware of timing rules: The ATO’s 45-day holding rule means you must own shares for at least 45 days (excluding purchase and sale dates) to qualify for franking credits.
- Stay compliant: Avoid dividend washing and similar schemes. The ATO’s 2025 focus means penalties for misuse are more likely.
Always review your portfolio regularly to ensure your investments align with your tax position and long-term goals.
Are Franking Credits Right for You?
Franking credits remain a powerful tool for boosting after-tax returns, especially for self-funded retirees and SMSFs. With no major legislative changes in 2025, they’re still a core part of Australian investing strategy—but require careful attention to eligibility rules and compliance.
If you’re receiving dividends or planning to invest in Australian shares, understanding how franking credits work could put more money in your pocket at tax time.
