Franking credits are one of the most valuable — and most distinctively Australian — features of investing in local shares. They exist to solve a simple problem: without them, company profits would effectively be taxed twice, once in the company’s hands and again when paid to you as a dividend. Australia’s dividend imputation system fixes this by “imputing” the tax the company already paid to you, the shareholder, as a credit.
For income-focused investors, retirees and self-managed super funds, understanding franking can materially lift after-tax returns. This guide explains how the system works, who benefits most, and how it connects to capital gains tax and retirement income. If you’re new to shares, our pillar guide on how to invest in shares in Australia sets the scene.
What Are Franking Credits?
When an Australian company earns a profit, it pays company tax on it — generally 30% for large companies (lower for some smaller companies). When it then pays part of that after-tax profit to you as a dividend, it can attach a franking credit representing the tax already paid.
Here’s the mechanism:
- The company pays tax on its profits.
- It pays you a dividend and attaches franking credits reflecting that tax.
- On your tax return, you declare the dividend plus the franking credit — this “grossed-up” amount is your taxable income from the dividend.
- The franking credit is then used to offset your own tax bill.
The result: the profit is ultimately taxed at your marginal rate, not twice. If your rate is below the company rate, you may get a refund; if it’s above, you top up the difference.
A Worked Example
Suppose you receive a fully franked dividend of $700 from a company that paid tax at 30%:
| Item | Amount |
|---|---|
| Cash dividend received | $700 |
| Franking credit attached | $300 |
| Grossed-up taxable income | $1,000 |
You declare $1,000 as income. The $300 franking credit offsets your tax:
- If your marginal rate is 0% (e.g. a fund in pension phase): your tax on $1,000 is nil, so the full $300 is refunded to you in cash.
- If your marginal rate is 30%: your tax on $1,000 is $300, exactly offset by the credit — you pay no further tax.
- If your marginal rate is 45%: your tax is $450, the credit covers $300, and you pay the remaining $150.
The lower your tax rate, the more the franking credit is worth — which is why franking is so powerful for low-rate investors.
Fully Franked, Partly Franked and Unfranked
Not every dividend carries full credits. A fully franked dividend has credits reflecting the full 30% company tax; a partly franked dividend carries some; an unfranked dividend carries none (typically where the company hasn’t paid Australian tax on that profit). Established Australian companies in banking, resources and infrastructure often pay fully franked dividends — a key reason they feature heavily in dividend investing in Australia.
The 45-Day Holding Rule
To claim franking credits, you generally must hold the shares “at risk” for at least 45 days (not counting the buy and sell days). This rule stops investors buying just before a dividend purely to grab the credits and selling straight after. A small-investor exemption applies where total franking credits are modest. If in doubt, confirm the current thresholds at ato.gov.au.
Who Benefits Most?
The value of a franking credit rises as your tax rate falls, so the biggest winners are low-rate investors:
- Retirees and SMSFs in pension phase — often taxed at nil, so franking credits can produce a cash refund, directly boosting retirement income.
- Low-income earners — may pay little tax, so credits offset most or all of it.
- Middle earners — reduce the tax owed on dividend income substantially.
- High earners — still benefit, but top up the gap between their rate and the company rate.
The Bridge to Capital Gains Tax
Franking credits address the tax on income (dividends), but shares also generate capital gains when you sell. These are two separate parts of your return, taxed differently. When you sell shares at a profit, capital gains tax applies — and individuals who’ve held the shares for more than 12 months qualify for the 50% CGT discount. For the full treatment of gains and losses on your share portfolio, see CGT on shares. A tax-efficient share strategy considers both: franking to lift after-tax income, and the CGT discount to reduce tax on growth.
The Bridge to Retirement
Franking credits are arguably at their most powerful in retirement. Because a superannuation fund paying an account-based pension can be taxed at nil on eligible earnings, the franking credits on its Australian shares become fully refundable cash. This is a cornerstone of income for many self-funded retirees, and a major reason franked Australian shares feature so heavily in retirement portfolios. If you’re building an income stream, our guide to dividend investing in Australia shows how franking and yield work together, and holding franked shares inside super is covered in investing in shares through an SMSF.
Practical Strategies
- Favour fully franked dividends if you’re a low-rate investor seeking income — the credits are worth most to you.
- Hold franked shares in the lowest-tax structure available to you, such as a super fund in pension phase, to maximise refunds.
- Mind the 45-day rule so you don’t inadvertently forfeit credits.
- Keep good records of franking credits received — they flow straight onto your tax return.
- Don’t chase franking alone. A dividend is only as good as the underlying company; sustainability of the payout matters more than the credit attached.
Common Pitfalls
- Buying purely to capture a dividend and falling foul of the 45-day rule.
- Ignoring the total return. A high franked yield from a company in decline can still lose you money overall.
- Overlooking the refund. Eligible low-rate investors and pension-phase funds should ensure they actually claim refundable credits.
- Assuming all dividends are franked. Always check whether a dividend is fully, partly or unfranked.
This article is general information only and not financial or tax advice; consider your own circumstances and speak to a licensed adviser or the ATO before acting.
Franking credits reward investors who understand them — especially those on low tax rates and in retirement. Combined with the CGT discount on long-held shares, dividend imputation makes Australian shares one of the more tax-friendly investments available. For the bigger picture, return to our pillar on investing in shares in Australia.