Unlocking Your Tax Advantage with Franking Credits
Are you an Australian investor receiving dividends from local companies? You could be missing out on significant tax benefits—or even cash refunds—if you don’t fully understand the power of franking credits.
Franking credits are a cornerstone of Australia’s tax system, designed to prevent the double taxation of company profits and boost your after-tax investment returns.
This guide explains what franking credits are, how they work, who benefits most, and how to maximise your entitlements. While it provides comprehensive information, it is not personal financial advice—for tailored strategies, consult a qualified financial advisor.
Franking Credits Explained: The Core Concept
The Australian Dividend Imputation System
Franking credits are part of Australia’s dividend imputation system, which ensures company profits are taxed only once:
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Company Pays Tax: Australian companies pay corporate income tax (up to 30%) on profits.
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Profits Distributed: The remaining profits are paid to shareholders as dividends.
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Tax Attributed: The tax already paid by the company is “imputed” to shareholders as a franking credit.
Preventing Double Taxation
Without franking credits, company profits would be taxed twice: first at the corporate level, then again at the shareholder level. Franking credits ensure that the tax paid by the company is recognised, preventing shareholders from paying tax twice on the same income.
History of Franking Credits
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Introduced in 1987 by the Hawke/Keating Labor government.
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Became fully refundable in 2000, allowing excess franking credits to be refunded in cash, significantly benefiting low-income earners and retirees.
How Franking Credits Work in Practice
The Company’s Role
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Companies maintain a franking account to track tax paid.
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Dividends can be fully franked, partially franked, or unfranked.
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A 100% franked dividend means the full corporate tax rate has been paid on the underlying profits.
The Shareholder’s Role
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You receive two components:
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Cash dividend – the actual payment.
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Franking credit – the imputed tax paid by the company.
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Both are declared as assessable income (“grossing up”) and the franking credit offsets your personal income tax.
Types of Dividends
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Fully Franked: Full corporate tax paid; shareholders get full franking credit.
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Partially Franked: Partial tax paid; shareholders get proportional credit.
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Unfranked: No tax paid; shareholders pay full personal tax.
Example: Fully Franked Dividend
Company tax rate: 30%
Cash dividend: $70
Franking credit: $30
Total assessable income: $100
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0% marginal tax: Receive $30 refund
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19% marginal tax: $19 covers tax, $11 refunded
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30% marginal tax: No extra tax, no refund
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45% marginal tax: $30 offsets, pay remaining $15
Franking credits reduce overall tax and may provide cash refunds, making franked dividends attractive.
Who Benefits Most from Franking Credits?
Low-Income Earners and Retirees
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Marginal tax below 30%? Receive cash refunds for excess franking credits.
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Retirees relying on dividends can significantly boost disposable income.
Self-Managed Super Funds (SMSFs)
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Pension phase SMSFs have 0% tax on earnings, making franking credits fully refundable.
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Provides a powerful boost to retirement income.
Other Australian Resident Investors
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Higher-income investors still benefit by reducing tax payable on dividends.
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Increases after-tax returns compared to unfranked dividends.
Eligibility and Key Rules
Residency Requirement
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Must be an Australian resident for tax purposes. Non-residents cannot claim franking credits.
45-Day Holding Period Rule
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Must hold shares “at risk” for at least 45 days (or 90 for certain preference shares).
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Ensures credits aren’t claimed by short-term buyers.
Related Payments Rule
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Prevents passing the benefit of franking credits to someone else.
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Professional advice recommended if this rule applies.
Small Shareholder Exemption
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If annual franking credits are under $5,000, the 45-day rule generally does not apply.
Claiming Your Franking Credit Refund
When and How
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Apply anytime after July 1 for the previous financial year.
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Methods:
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myTax (online via myGov) – preferred method; often pre-fills dividend info.
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Phone application – using NAT 4105 form.
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Postal form – complete and mail NAT 4105.
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Automatic Refunds (2025 Update)
Eligible individuals aged 60+ may receive refunds automatically if criteria are met, including:
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Age ≥ 60
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Dividend income ≤ $18,200
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Shares held ≥ 2 years
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Franking credits ≤ $5,460
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No additional tax liabilities
Documentation
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Keep dividend statements for cash dividend and franking credit amounts.
Important Considerations
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Prior years’ credits can still be claimed.
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TFN withholding may require full tax return.
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Joint investments require separate declarations.
Calculating Your Franking Credits
Formula (Fully Franked Dividend):
Franking Credit=Dividend Amount×Company Tax Rate1−Company Tax Rate\text{Franking Credit} = \text{Dividend Amount} \times \frac{\text{Company Tax Rate}}{1 – \text{Company Tax Rate}}
Example:
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Dividend: $70
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Company tax: 30%
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Franking Credit: $70 × 0.42857 ≈ $30
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Total assessable income: $100
Partially franked dividends are adjusted by the franking percentage.
Franking Credits in Different Investment Vehicles
Direct Share Investments
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Franking credits attach directly to dividends paid by Australian companies.
Managed Funds and ETFs
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Distributing Funds: Dividend income, including franking credits, distributed to investors.
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Accumulating Funds: Credits contribute indirectly to fund growth.
Trusts and Partnerships
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Beneficiaries or partners may claim a share of franking credits from distributions, subject to integrity rules.
Pros, Cons, and Criticisms
Arguments in Favour
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Fairness: Prevents double taxation.
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Domestic investment: Encourages investment in Australian companies.
Arguments Against
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Government revenue cost: Refunds can be significant.
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Disproportionate benefit: Often benefits wealthy retirees.
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System complexity: Adds layers to taxation.
International Comparison
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Australia’s system is unique; most countries tax dividends twice without credits.
Tips for Maximising Franking Credit Benefits
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Strategic Portfolio Review:
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Seek fully franked dividends
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Diversify portfolio to manage risk
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Tax Planning:
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Know your marginal tax rate
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Consider SMSF pension phase for tax-free benefits
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Professional Advice:
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Consult a qualified financial advisor or tax agent
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Ensure eligibility rules like the 45-day holding period are met
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Franking credits can significantly enhance after-tax returns. Understanding eligibility, claiming processes, and strategic investment decisions empowers you to maximise these benefits.
Book a free consultation with a Financial Advisor in Melbourne to optimise your strategy.
Disclaimer
This article is for general information only and does not constitute financial or tax advice. Individual circumstances may vary. Always consult a qualified financial advisor or tax professional before making financial decisions.
