Franking Credits Explained for Australian Investors (2026)

When an Australian company earns a profit, it pays tax on those profits before distributing dividends to shareholders. To ensure shareholders are not taxed twice on the same income, companies may attach franking credits to dividends. These credits represent the tax already paid by the company.

How the process works:

• The company pays tax on its profits.
• It distributes dividends to shareholders, attaching franking credits that reflect the tax paid.
• Shareholders declare both the dividend and the franking credit on their tax return.
• The franking credit is used to offset the shareholder’s own tax liability.

If your personal tax rate is lower than the company tax rate, you may receive a refund for the difference. If your rate is higher, you pay the difference. This system ensures that, overall, income is taxed at your marginal rate, not twice.

For the 2026 financial year, the core features of franking credits remain in place for most investors:

• Company tax rates: Large companies generally pay a 30% tax rate, while eligible smaller companies may pay a lower rate.
• Refunds: Individuals and superannuation funds can still claim refunds if their franking credits exceed their tax liability.
• Compliance: The Australian Taxation Office (ATO) continues to monitor for artificial schemes designed to maximise franking credits. Investors should ensure their strategies comply with all relevant rules.

Most established Australian companies, particularly in sectors like banking, resources, and infrastructure, continue to pay fully or partially franked dividends.

Franking credits can benefit a wide range of investors, but the impact is greatest for those on lower tax rates or in tax-advantaged structures. Here are some common scenarios:

Retirees and Self-Managed Super Funds (SMSFs)

Retirees drawing a pension from their SMSF may pay little or no tax. In these cases, franking credits attached to dividends can result in a cash refund from the ATO, providing a boost to retirement income.

Working Australians

If you are employed and your marginal tax rate is similar to or lower than the company tax rate, franking credits can reduce or eliminate the tax you pay on dividends. If your marginal rate is higher, you will pay the difference, but the credit still offsets a significant portion of your tax liability.

High-Income Investors

Those on higher marginal tax rates will still benefit from franking credits, but may have to pay additional tax on dividends if their rate exceeds the company rate. The franking credit, however, reduces the overall tax payable on dividend income.

Example: How Franking Credits Work

Suppose you receive a fully franked dividend of $700 from an Australian company. The franking credit attached is $300 (assuming a 30% company tax rate). For tax purposes, you declare $1,000 as income ($700 dividend + $300 franking credit). The $300 franking credit is then used to offset your tax liability. If your tax bill on this income is less than $300, you may receive a refund for the difference.

The 45-Day Holding Rule

To be eligible for franking credits, you generally need to hold shares 'at risk' for at least 45 days (excluding the purchase and sale dates). This rule is designed to prevent short-term trading strategies that aim to capture franking credits without genuine investment risk.

Not All Dividends Are Franked

Some dividends are fully franked, some are partially franked, and others are unfranked. The level of franking depends on how much tax the company has already paid. Companies that have paid Australian company tax on their profits are more likely to issue franked dividends.

Refunds for Excess Franking Credits

If your franking credits exceed your tax liability, you may be eligible for a refund from the ATO. This is common for retirees and low-income investors, as well as superannuation funds in pension phase.

ATO Compliance Focus

The ATO continues to monitor for schemes that seek to artificially increase franking credits, such as dividend washing. Investors should ensure their strategies comply with all relevant rules to avoid penalties.

If you want to maximise the benefits of franking credits, consider these approaches:

Focus on Franked Dividends

Invest in companies with a strong record of paying fully franked dividends. Many established Australian companies, particularly in the banking, resources, and infrastructure sectors, regularly distribute franked dividends.

Use Tax-Advantaged Structures

Holding franked shares in a self-managed super fund (especially in pension phase) or as a low-tax individual can increase the value of franking credits. In some cases, excess credits can be refunded, providing a direct boost to income.

Review Your Portfolio Regularly

As your personal circumstances and tax position change, review your investments to ensure they continue to align with your goals and make effective use of franking credits. If you are unsure, consider seeking advice from a qualified accountant or financial adviser.

Stay Informed About Policy Changes

While the fundamentals of franking credits have remained stable, it’s important to stay up to date with any changes to tax laws or company tax rates that could affect your eligibility or the value of franking credits.

What is a franking credit?

A franking credit is a tax credit attached to dividends paid by Australian companies, representing the tax already paid by the company on its profits.

Can I get a refund for franking credits?

If your franking credits exceed your tax liability, you may be eligible for a refund from the ATO. This is common for retirees and low-income investors.

Do all dividends come with franking credits?

Not all dividends are franked. The amount of franking depends on how much tax the company has paid. Some dividends may be partially franked or unfranked.

What is the 45-day rule?

The 45-day holding rule requires you to hold shares for at least 45 days (excluding purchase and sale dates) to be eligible for franking credits. This rule helps prevent short-term trading strategies aimed at capturing credits.

Franking credits remain a valuable feature of the Australian tax system, especially for investors seeking to maximise after-tax returns from dividend income. With the rules largely unchanged in 2026, understanding how franking credits work—and how they apply to your situation—can help you make more informed investment decisions. Always ensure your strategies comply with current regulations and consider professional advice if you are unsure about your eligibility or the best approach for your circumstances.