If you own shares in Australian companies, you have probably seen the term "franking credits" on your dividend statements and wondered what it actually means. Franking credits are one of the most generous features of the Australian tax system, and understanding them can meaningfully boost your investment returns. Here is how dividend imputation works, explained without the jargon.
The Problem Franking Credits Solve
To understand franking credits, you first need to understand the problem they fix: double taxation. When an Australian company makes a profit, it pays company tax on that profit — currently 30% for large companies or 25% for small ones. The company then pays some of its after-tax profit to shareholders as a dividend.
Without any special rule, that money would be taxed twice: once as company profit, and again as income in the shareholder's hands. Australia decided this was unfair, so in 1987 it introduced dividend imputation. The idea is simple — give shareholders credit for the tax the company has already paid, so the profit is only taxed once.
How Franking Credits Actually Work
When a company pays a dividend out of profits it has already paid tax on, it attaches a franking credit (also called an imputation credit). This credit represents the company tax already paid on your share of the profit.
Here is the clever part. You must declare both the cash dividend and the franking credit as income — this is called "grossing up." But you then receive the franking credit as a tax offset, dollar for dollar, against your tax bill. So you are taxed on the full pre-tax profit, but you get full credit for the tax the company already paid.
Let us see it in numbers. Suppose you receive a $700 fully franked dividend:
- Cash dividend received: $700
- Attached franking credit (company tax already paid at 30%): $300
- Grossed-up taxable income you declare: $1,000
- You then claim the $300 franking credit against your tax bill
Use our dividend and franking credit calculator to gross up your own dividends and see the credit attached.
Why Your Tax Rate Decides Everything
The beauty of imputation is that your final tax outcome depends entirely on your personal marginal rate compared to the company rate. There are three possible scenarios:
You are on a higher rate than the company
If your marginal rate is 37% or 45%, the 30% franking credit covers most but not all of your tax. You pay a little extra "top-up" tax on the dividend. On that $1,000 grossed-up dividend, a 45% taxpayer owes $450 in tax, uses the $300 credit, and pays $150 extra.
You are on the same rate as the company
If your marginal rate is exactly 30%, the franking credit cancels out your tax on the dividend completely. You pay nothing more and receive nothing back.
You are on a lower rate than the company
This is where it gets exciting. If your marginal rate is below 30% — or you pay no tax at all — the franking credit is worth more than the tax you owe on the dividend. The excess is refunded to you in cash. A retiree drawing a tax-free pension from super can receive the entire $300 franking credit back as a refund, turning a $700 dividend into $1,000 in their pocket.
To see which marginal bracket you fall into, add your grossed-up dividends to your other income and check the result with our salary calculator.
Fully Franked vs Partly Franked
Not every dividend comes with full franking credits. A fully franked dividend means the company paid the full 30% tax on those profits, so the maximum credit is attached. A partly franked dividend means only some of the profit was taxed in Australia — often because the company earned money overseas. An unfranked dividend carries no credit at all, so you pay full tax on it.
Australia's big banks, miners, and supermarket chains typically pay fully franked dividends, which is one reason they are so popular with income-focused investors and self-managed super funds.
The 45-Day Holding Rule
There is one important catch to be aware of. To claim franking credits, you generally need to hold the shares "at risk" for at least 45 days (not counting the day you buy or sell) around the dividend date. This rule stops people from buying shares purely to grab the credit and selling immediately afterwards — a practice known as dividend stripping.
There is a small-shareholder exemption: if your total franking credits for the year are $5,000 or less, the 45-day rule does not apply to you. Most everyday investors fall under this threshold and can ignore the rule, but larger portfolios need to plan around it.
Why Franking Credits Matter for Your Strategy
Franking credits make Australian shares unusually attractive for income investors compared to many other countries. A fully franked dividend yield of 5% can be worth around 7% once you gross it up for the franking credit — a meaningful boost.
They are especially powerful inside superannuation. A super fund in pension phase pays no tax, so it receives the full franking credit back as a cash refund. This is why so many self-managed super funds load up on franked Australian shares. The same logic helps low-income earners and part-time workers who fall below the 30% rate.
The Bottom Line
Franking credits are one of the genuine bright spots of the Australian tax system. By preventing the double taxation of company profits, dividend imputation rewards share investors — and is most valuable to those on lower tax rates, including retirees and low-income earners who can receive credits back as cash.
Before you build a dividend-focused portfolio, understand exactly how the credits flow through to your tax. Use our franking credit calculator to gross up your dividends, then check how they affect your total tax position with the salary calculator. Once you grasp imputation, you will look at Australian shares in a whole new light.