Franking Credits Explained
Australia's dividend imputation system is one of the most uniquely beneficial features of investing locally — yet most guides make it more complicated than it needs to be. Here's how franking credits actually work, with plain-English worked examples for every tax bracket.
Key takeaways
- ·Franking credits stop company profits being taxed twice — once at the company level (30%), and again when you receive dividends.
- ·If your marginal tax rate is below 30%, you get the difference back as a cash refund from the ATO. Below the $18,200 tax-free threshold, a fully franked dividend is effectively a full refund.
- ·You must hold shares 'at risk' for at least 45 days around the ex-dividend date to claim the credits (the small investor exemption applies if your total offset is under $5,000).
- ·Australian ETFs (VAS, A200, VHY) pass through franking credits from underlying ASX shares — check your distribution statement each year.
- ·US stocks bought via Stake have zero franking credits — US companies don't pay Australian corporate tax. US dividends are taxed as ordinary income with a 15% withholding credit instead.
- ·The 1987 Keating reform created the system; Australia is one of only a handful of countries in the world with full dividend imputation.
Not tax advice. This guide is for general educational purposes only. Tax obligations depend on your individual circumstances. Consult a registered tax agent or accountant for advice specific to your situation. ATO rules change — verify current requirements at ato.gov.au.
What is a franking credit?
When an Australian company makes a profit, it pays corporate income tax to the ATO — currently 30% for large companies (those with annual turnover of $50 million or more) and 25% for small-to-medium businesses under the $50m threshold.
The company then pays a dividend to shareholders from the remaining after-tax profit. Without imputation, shareholders would then pay income tax on that same money a second time — the classic "double taxation" problem.
Australia's solution, introduced in 1987 by the Hawke–Keating government as part of the dividend imputation system, is the franking credit. When a company pays a dividend from profits it has already paid Australian tax on, it attaches a credit representing that prepaid tax. Shareholders include both the cash dividend and the credit in their taxable income — but receive a full tax offset for the credit amount.
The simple version
Think of a franking credit as a receipt. The company says: "We earned $100, paid $30 in tax to the ATO, and here's $70 as your dividend — plus a receipt showing $30 was already paid on your behalf." When you file your tax return, the ATO uses that receipt. If you owe less than $30 in tax on that income, they refund the difference.
Historical context
Australia adopted full dividend imputation under Treasurer Paul Keating in 1987 — part of a broader package of economic reforms. The system made Australia one of fewer than ten countries in the world that fully impute corporate taxes through to shareholders. New Zealand is the only other major economy with a comparable system. The reform was designed to encourage more domestic equity investment and correct the distortion where retained earnings were tax-advantaged over dividends.
How the imputation system works
Grossing up the dividend
The first step is to calculate the gross (pre-tax) value of a fully franked dividend. If a company pays $0.70 per share as a fully franked dividend at the 30% corporate tax rate, the grossed-up amount is:
Gross dividend = Cash dividend ÷ (1 − corporate tax rate)
= $0.70 ÷ (1 − 0.30) = $1.00
Franking credit = $1.00 − $0.70 = $0.30
Your taxable income from this dividend is $1.00 (the gross amount). You then receive a tax offset of $0.30 (the franking credit) against your tax bill.
What "fully franked" and "partially franked" mean
Fully franked (100%)
The entire dividend was paid from profits that have had Australian corporate tax paid on them. The franking credit equals 30/70 of the cash dividend (for a 30% tax rate company). Most major ASX-listed companies (CBA, BHP, Woolworths) aim for 100% franked dividends.
Partially franked
Part of the dividend was paid from untaxed profits (e.g. overseas earnings). The statement will show a franking percentage such as 60% — meaning 60% of the dividend carries a full credit, 40% does not. The remaining 40% is still taxable income with no offset.
SME company rate: Small companies with annual turnover under $50 million pay a 25% corporate tax rate and can only frank dividends at 25%. The franking credit formula adjusts accordingly: credit = 25/75 × cash dividend. Check dividend statements from smaller companies carefully.
Worked examples at every tax bracket
Using a $1,000 fully franked dividend from a large company at the 30% corporate tax rate. All figures are for the 2025–26 financial year and exclude the Medicare levy.
Starting point: $1,000 fully franked dividend (30% rate)
Cash dividend received: $1,000.00
Franking credit (30/70 × $1,000): $428.57
Grossed-up income (add to your return): $1,428.57
Tax offset applied: −$428.57
| Investor type | Marginal rate (2025–26) | Tax on $1,428.57 | Less: franking offset | Net outcome |
|---|---|---|---|---|
| Below tax-free threshold | 0% (income < $18,200) | $0.00 | −$428.57 | +$428.57 refund |
| Low–middle income | 16% ($18,201–$45,000) | $228.57 | −$428.57 | +$200.00 refund |
| Middle income | 30% ($45,001–$135,000) | $428.57 | −$428.57 | $0 (break-even) |
| High income | 37% ($135,001–$190,000) | $528.57 | −$428.57 | $100.00 payable |
| Top marginal rate | 45% (over $190,000) | $642.86 | −$428.57 | $214.29 payable |
2025–26 tax rates (post-Stage 3 cuts). Medicare levy (2%) not included. Based on $1,000 cash dividend at 30% corporate tax rate.
Detailed example 1: Low-income investor (gets a refund)
Scenario: Part-time worker with $12,000 salary — total income well below the $18,200 tax-free threshold
Cash dividend from CBA (500 shares × $2.00 per share): $1,000.00
Franking credit attached (30/70 × $1,000): $428.57
Gross income to declare on tax return: $1,428.57
Total income (salary + dividend gross-up): $12,000 + $1,428.57 = $13,428.57
Below $18,200 tax-free threshold → income tax: $0.00
Franking offset (can be refunded if it exceeds tax): $428.57
ATO refund: $428.57 deposited to your bank account
This is the unique power of Australian dividend imputation for low-income investors. The refundability policy (introduced in 2000) means even those who pay no income tax receive the credit as a cash payment.
Detailed example 2: High-income investor (45% marginal rate)
Scenario: Executive earning $250,000 salary, receives the same $1,000 fully franked dividend
Cash dividend: $1,000.00
Franking credit: $428.57
Gross dividend income: $1,428.57
Tax at 45% marginal rate: $642.86
Less: franking credit offset: −$428.57
Net additional tax from this dividend: $214.29
Effective total tax on $1,000 cash (incl. company paid): $428.57 + $214.29 = $642.86
Effective rate on original cash: 64.3% = effectively 45% on the gross
The franking credit means the high-income investor pays their full 45% marginal rate on the gross income — but 30% was already covered by the company. The investor "tops up" the difference. This is correct; it is not a penalty — the total tax is simply their marginal rate applied to the gross income.
The 45-day rule
The 45-day holding period rule was introduced to stop investors buying shares immediately before a dividend, claiming the franking credits, then selling immediately after (a practice known as "dividend washing"). Under the rule, you must hold the shares "at risk" for at least 45 days in the qualification period (90 days for preference shares).
The holding period
The 'qualification period' runs from the day after you acquire the shares to 45 days after the ex-dividend date. You must be 'at risk' for at least 45 days within that window. The day of acquisition and the day of disposal are not counted as holding days. Consult ato.gov.au or a registered tax agent for your specific situation.
Must be 'at risk'
Simply holding the shares isn't enough — you must be genuinely exposed to price movements. If you've hedged your position (e.g. with options or CFDs that offset your price risk), you fail the test even if you've held for 45+ days. The ATO can deny the credits in these cases.
Small investor exemption
If your total franking offset for the year is $5,000 or less, the 45-day rule does not apply to you. This exemption covers most retail investors with modest ASX portfolios. If you're above $5,000 in offsets, talk to your accountant.
ETF investors are usually unaffected
If you hold ASX ETFs like VAS or A200 for the long term (as most passive investors do), the 45-day rule is rarely an issue. It most commonly catches short-term traders who buy specifically to capture a dividend then sell.
ETFs and franking credits
Australian-domiciled ETFs that hold ASX shares pass through franking credits from the underlying companies to investors. When BHP or CBA pays a fully franked dividend into VAS or A200, the managed fund accumulates those credits and distributes them to unit holders alongside the cash distributions.
| ETF | Holdings | Typical franking | Why |
|---|---|---|---|
| VAS (Vanguard Australian Shares) | ASX 300 | ~80–100% | Holds major Australian companies that pay high franked dividends |
| A200 (BetaShares Australia 200) | ASX 200 | ~80–100% | Similar to VAS — top Australian companies, high franking |
| VHY (Vanguard High Yield) | High-yield ASX stocks | Often 100% | Targets high-dividend payers, many of which are fully franked |
| VGS (Vanguard Global Shares) | Global developed markets | Near 0% | Holds non-Australian companies that pay no Australian corporate tax |
| IVV (iShares S&P 500) | US S&P 500 | 0% | All US companies — no Australian corporate tax paid |
| NDQ (BetaShares Nasdaq 100) | US Nasdaq 100 | 0% | All US tech companies — no Australian corporate tax |
Franking levels vary year to year. Check the annual distribution statement from the fund manager for exact credits — they're always disclosed there.
Tax treatment: ETF distributions are treated exactly the same as direct share dividends for franking purposes. You report the cash distribution plus attached franking credits as dividend income on your return. The credits offset your tax bill in the same way.
US stocks and why they have no franking credits
When you buy US stocks through Stake — Apple, Microsoft, Nvidia, or any NYSE/NASDAQ-listed company — the dividends you receive carry zero franking credits. This is fundamental to how the Australian imputation system works:
Franking credits only arise from Australian corporate tax. US companies pay US federal income tax (and state taxes) — not Australian corporate tax. Since no Australian tax has been prepaid, there are no Australian franking credits to attach.
ASX dividend (Australian company)
- Franking credits attached (if company paid Aus tax)
- Grossed-up income reported on Aus return
- Tax offset applied — refund possible if credits > tax
- No withholding at source
US dividend (via Stake)
- —No franking credits
- 15% US withholding (with W-8BEN) — or 30% without
- Gross dividend reported as foreign income in Aus
- 15% withholding claimed as FITO (Foreign Income Tax Offset)
What this means for your portfolio strategy
For income-focused investors in lower tax brackets, Australian shares with high franking are genuinely tax-advantaged compared to US dividend stocks. The refundability of excess franking credits is a structural benefit with no equivalent in any other major market. However, total return (capital growth + dividends) matters more than franking alone — and the US market has historically delivered superior long-term capital growth. A diversified portfolio typically holds both.
How to claim franking credits on your tax return
Claiming franking credits through myTax (ATO's online lodgement system) or via a tax agent is straightforward. Here's what you need:
Get your dividend statements
Your broker (Stake, CommSec, etc.) will send annual dividend statements, or they're available in the app. Each statement shows: company name, payment date, cash dividend amount, franking percentage, franking credit amount, and grossed-up amount. Keep these.
Go to 'Dividends' in myTax
In your ATO myTax return, find the 'Dividends' section. Many dividend amounts are pre-filled from share registries (Computershare, Link Market Services) — always check these are correct and add any that are missing.
Enter gross dividend and franking credits
For each dividend, enter the grossed-up (gross) amount as income, and the franking credit separately. myTax calculates the tax offset automatically. The gross amount = cash dividend + franking credit.
The ATO calculates your refund or bill
After calculating your total tax liability, the ATO applies the franking offsets. If your offsets exceed your tax payable, the ATO refunds the excess directly to your nominated bank account — usually within 2–4 weeks of lodgement.
Pre-filling: The ATO pre-fills many dividend entries from data provided by share registries. However, this data often arrives late (sometimes after 31 July). Don't lodge too early — wait until mid-August to ensure all data is available, or check your dividend statements manually.
The 2019 election controversy
The 2019 federal election saw franking credits become a defining political issue. Labor, led by Bill Shorten, proposed to end the cash refundability of excess franking credits for most investors — with an exemption for pensioners and retirees below a certain income threshold.
The policy was framed as closing a "tax loophole" that disproportionately benefited wealthy self-funded retirees. In aggregate, the Australian Treasury was refunding approximately $5.9 billion per year in excess franking credits — a significant fiscal cost.
Critics — particularly self-managed super funds (SMSFs) in pension phase, which pay 0% tax and therefore claimed full refunds — argued the policy would devastate the income of millions of retirees who had structured their finances around the system. Many had done so rationally: they'd been invested in Australian shares for decades, before the refundability rules changed.
The controversy was significant enough to be widely cited as a major factor in Labor's unexpected election defeat. Scott Morrison's Coalition government won, and franking credit refundability remained unchanged.
Since Labor's 2022 election victory under Anthony Albanese, the party has not revisited the policy. As of 2026, franking credit refundability is intact and not on the legislative agenda.
Frequently asked questions
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