Franking Credits and Dividend Imputation Explained for Australian Investors

The same $700 fully franked dividend can hand one investor $300 cash and cost another $150 — here's exactly why.

By ECTD Editorial · Published 2026-05-08 · Updated 2026-05-08

If you own Australian shares and you've ever opened your tax statement and seen a line called franking credit sitting next to your dividend, you've run into one of the more generous quirks of the Australian tax system. It's also one of the most misunderstood. This guide walks through exactly what a franking credit is, the gross-up and tax-offset machinery the ATO uses to apply it, the difference between fully and partly franked dividends, and a worked example showing what a $700 fully franked dividend is actually worth to investors on different incomes.

The problem franking credits were invented to solve

Before 1987, Australia taxed company profits twice. A company earned a profit, paid company tax on it, then paid what was left to shareholders as a dividend. The shareholder then paid income tax on that same dividend at their own marginal rate. The profit got taxed once in the company's hands and again in the investor's hands. Economists call this double taxation, and it made owning shares less attractive than it should have been.

Australia's answer was dividend imputation — a system that "imputes", or attributes, the company tax already paid back to the shareholder. The franking credit is the receipt for that company tax. When a company pays tax on its profit and then passes the after-tax profit to you as a dividend, it attaches a credit equal to the tax it already paid. You then get to use that credit against your own tax bill. The net effect is that the profit is taxed once, at your marginal rate, not twice.

Australia is one of only a handful of countries that runs a full imputation system, and we're rarer still in making the credits refundable — more on that below, because it's the part that matters most for retirees and low earners.

What a franking credit actually represents

The standard company tax rate in Australia is 30%. (Smaller companies that qualify as "base rate entities" — broadly, those with turnover under $50 million and mostly passive income below a threshold — pay 25%, and they frank their dividends at that lower 25% rate.) For most large listed companies on the ASX, the rate that matters is 30%.

Think of it from the company's side. Say a company earns $100 of profit. It pays $30 in company tax, leaving $70. It pays that $70 to you as a fully franked dividend. The $30 of tax it already handed to the ATO doesn't vanish — it becomes a $30 franking credit attached to your $70 dividend. The credit is real money the ATO has already received on your behalf.

The 30/70 shortcut: For a fully franked dividend from a company taxed at 30%, the franking credit equals the cash dividend multiplied by 30/70 (about 0.4286). A $70 dividend carries a $30 credit; a $700 dividend carries a $300 credit. Your broker or share registry shows both figures on your dividend statement and your annual tax summary, so you rarely calculate it yourself — but knowing the ratio helps you sense-check the numbers.

The gross-up and the tax offset — the two-step mechanic

This is where most people get confused, so go slowly. The franking credit does two distinct jobs in your tax return, and they pull in opposite directions before settling on a fair result.

Step one: the gross-up (it goes into your income)

You don't just declare the cash you received. You declare the cash dividend plus the franking credit as assessable income. This is the "gross-up". The logic is that the pre-tax company profit — the full $100 in the earlier example — is what you're really being assessed on, because that whole amount was earned on your behalf as a part-owner of the company.

So a $70 fully franked dividend becomes $100 of taxable income on your return ($70 cash + $30 credit). It feels like you're being taxed on money you never received, and in a sense that's true — but step two fixes it.

Step two: the tax offset (it comes off your tax bill)

After your total tax is calculated on your grossed-up income, the franking credit is then applied as a tax offset — a dollar-for-dollar reduction in the tax you owe. A tax offset is far more valuable than a deduction. A deduction reduces the income you're taxed on; an offset reduces the actual tax payable, dollar for dollar.

So the credit is counted as income (pushing your tax up) and then subtracted from your tax bill (pulling it back down). The result is that you're taxed on the company profit at your marginal rate, with full recognition for the 30% the company already paid.

Why this matters for high and low earners differently: If your marginal rate is exactly 30%, the credit washes out perfectly — no extra tax to pay, no refund. If your rate is above 30%, you top up the difference. If your rate is below 30% (or zero), the company overpaid tax relative to your rate, and you get the excess back. That asymmetry is the whole story.

Fully franked, partly franked, and unfranked

Not every dividend carries a full credit. The franking percentage tells you how much company tax sits behind the dividend.

Fully franked (100%): the company has paid the full 30% (or 25%) Australian company tax on the profit behind the dividend. The maximum credit is attached. Most dividends from large, Australian-focused ASX companies — the big banks, miners, supermarkets — are fully franked.
Partly franked: only a portion of the dividend carries a credit. A dividend franked to 50% has half the credit of a fully franked one. This usually happens when a company earns some of its profit overseas (and pays foreign tax, not Australian tax), or hasn't paid full Australian tax on all its profit.
Unfranked (0%): no credit at all. The dividend is paid from profits on which no Australian company tax has been paid — common with companies whose earnings are largely offshore, or certain trusts and property vehicles. You pay full tax on an unfranked dividend at your marginal rate with nothing to offset it.

This is why two shares paying the same cash dividend can leave you in very different after-tax positions. A fully franked $700 dividend is worth materially more to a low-rate investor than an unfranked $700 dividend, because of the refundable credit riding along with it.

Refundable credits — the part that's genuinely unusual

Here's the feature that makes Australia's system stand out. Since 2000, franking credits have been refundable for resident individuals and complying super funds. If your franking credits exceed the total tax you owe, the ATO pays you the difference as a cash refund.

Picture a retiree whose taxable income sits below the $18,200 tax-free threshold. They owe no income tax at all. But the companies they own paid 30% tax on the profits behind their dividends. Because the credits are refundable, that retiree can lodge a return and receive the franking credits back as cash. For self-managed super funds in pension phase — where the fund's tax rate is 0% — every franking credit attached to its Australian shares can come back as a refund. This is a large part of why fully franked Australian shares are so popular with retirees and SMSFs.

There are anti-avoidance rules — don't ignore them: You can't buy shares the day before a dividend purely to harvest the credit and sell straight after. The ATO's 45-day holding rule generally requires you to hold the shares "at risk" for at least 45 days (not counting the buy and sell days) to be entitled to the franking credits. There's a small shareholder exemption for those whose total franking credits are $5,000 or less in the year, but above that the rule bites. If you trade actively around dividend dates, get advice.

Worked example: a $700 fully franked dividend at four income levels

Let's put real numbers through the machine. You receive a $700 fully franked dividend from a company taxed at 30%. The attached franking credit is $700 × 30/70 = $300. Your grossed-up income from this dividend is $700 + $300 = $1,000. We'll calculate the tax on that $1,000 at each investor's marginal rate, then subtract the $300 credit, using the 2025–26 individual rates (ignoring the Medicare levy for clarity).

The 2025–26 marginal rates are: nil up to $18,200; 16% from $18,201 to $45,000; 30% from $45,001 to $135,000; 37% from $135,001 to $190,000; and 45% above $190,000.

Investor A — income under the tax-free threshold (0% marginal rate)

Tax on the $1,000 grossed-up dividend: $0. Franking credit offset: $300. Because the credit is refundable, this investor receives the full $300 back as a cash refund. Their total return from the $700 dividend is effectively $1,000 — the cash plus the refunded credit. This is the retiree scenario.

Investor B — 16% marginal rate (income between $18,201 and $45,000)

Tax on $1,000 at 16% = $160. Subtract the $300 credit: $160 − $300 = −$140. The credit more than covers the tax on this income, so this investor pays nothing on the dividend and receives a $140 refund of the excess credit. Out of pocket they keep the $700 cash and get $140 back.

Investor C — 30% marginal rate (income between $45,001 and $135,000)

Tax on $1,000 at 30% = $300. Subtract the $300 credit: $300 − $300 = $0. The credit exactly cancels the tax owed on the dividend. This investor pays no additional tax and gets no refund — the imputation system has done its job perfectly, taxing the profit once at 30%. They simply keep the $700 cash.

Investor D — 45% marginal rate (income above $190,000)

Tax on $1,000 at 45% = $450. Subtract the $300 credit: $450 − $300 = $150 extra tax to pay. The company prepaid 30%, but this investor's rate is 45%, so they top up the 15% difference. After the additional $150, they're left with $550 in their pocket from the original $700 cash dividend (and the $300 credit was used up against tax).

0% rate: $300 cash refund — total benefit $1,000.
16% rate: $140 refund — keeps $700 plus $140.
30% rate: nothing extra owed, nothing refunded — keeps $700.
45% rate: $150 extra tax owed — keeps $550 of the cash.

The same $700 dividend produces a range of outcomes from a $300 cash bonus to a $150 tax bill, depending entirely on the investor's marginal rate. That's imputation working as designed: the company tax becomes a prepayment, and everyone settles up at their own rate.

Watch the grossed-up figure, not just the cash yield: When comparing the income from fully franked shares against, say, a term deposit or an unfranked investment, compare the grossed-up yield. A 5% fully franked dividend yield is closer to a 7.1% pre-tax yield once you add the credits, before you apply your own rate. Comparing the bare cash dividend understates what franked shares are really delivering to lower-rate investors.

Practical points for your tax return

You don't need to hand-calculate any of this in most cases. Australian share registries (Computershare, MUFG/Link) and your broker report dividend and franking-credit figures, and these usually pre-fill into your myGov / ATO return. Exchange-traded funds and managed funds that hold Australian shares pass franking credits through to you via their annual tax statements (the AMIT or standard distribution statement), so even an index investor in something like a broad ASX 200 ETF receives credits.

Check your dividend statement for the franking percentage and credit amount before assuming a dividend is fully franked — many global and property holdings are not.
If you invest through a super fund, the fund captures the credits for you; in accumulation phase they offset the fund's 15% tax, and in pension phase they can generate refunds within the fund.
If you hold shares in a joint name or a family trust, the credits flow according to ownership or trust distributions — the rules get more involved, and the 45-day rule applies at the entity level.
Keep an eye on the $5,000 small shareholder threshold if you trade around ex-dividend dates; below it the 45-day holding rule is waived.

Franking credits are one of the few genuinely investor-friendly features of the Australian tax code, and they reward holding profitable, tax-paying Australian companies for the long term. Understanding the gross-up and offset mechanic — income up, then tax down — turns a confusing line on your tax statement into a number you can actually plan around.

General advice warning: This article is general information only and does not take into account your personal circumstances, objectives or financial situation. It is not personal financial, tax or investment advice. Tax rules around franking credits, the holding-period rules and refundability can change and depend on your individual situation. Before acting, consider seeking advice from a registered tax agent or licensed financial adviser, and refer to the ATO for current rules and rates.

General information only — not personal financial, tax, legal or medical advice. Consider your own situation and consult a licensed professional before acting. Figures are current as at the date shown above.