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Franking credits

A credit attached to an Australian dividend for the company tax already paid on that profit.

How franking credits flow from company profit to your tax returnA $1,000 profit is taxed 30% at company level, leaving $700 paid to you as a dividend with a $300 franking credit. You declare the grossed-up $1,000 and claim the credit, so the outcome depends on your marginal rate.Following $1,000 of company profitCOMPANY PROFIT$1,000CASH TO YOU$700FRANKING CREDIT$300YOU DECLARE$1,000Then the $300 credit is subtracted from the tax on that $1,000:Marginal rate 19%+$110 refundMarginal rate 30%$0 — squareMarginal rate 45%−$150 to payExcess credits are refunded in cash to Australian resident individuals.

Australian companies pay 30% tax on their profits before paying dividends. Without franking, you would then pay tax again on the same money — so the imputation system hands you a credit for the tax the company already paid.

You declare the grossed-up dividend (the cash plus the credit) as income, then subtract the franking credit from your tax bill. If your marginal rate is above 30% you pay the difference; if it is below 30%, the excess is refunded to you in cash.

That refundability is unusual internationally and is why franked dividends are especially valuable inside low-tax environments such as superannuation in pension phase, where the entire credit comes back as cash.

A $700 fully franked dividend

You receive $700 cash with a $300 franking credit attached. You declare $1,000 of income and claim the $300 credit. On a 30% marginal rate the tax owed is exactly $300, so the credit covers it and nothing more is payable.

The bit people get wrong

The grossed-up amount is what counts as income, not the cash you received. A $700 dividend adds $1,000 to your taxable income, which can quietly affect thresholds like the Medicare Levy Surcharge or HECS repayment income.

Common questions

What does 'fully franked' mean?

It means the company paid the full 30% company tax on the profit behind the dividend, so the maximum franking credit is attached. A partly franked dividend carries a smaller credit.

Do I get franking credits refunded in cash?

Yes, for Australian resident individuals. If your franking credits exceed the tax you owe, the excess is paid to you as a refund when you lodge your return.

Are franking credits worth chasing?

They genuinely improve after-tax returns, but they are one input among many. Buying a poor company for its franking credits is a well-worn way to lose more on capital than you gain in tax.

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Related terms

DividendA share of company profits paid to shareholders, usually twice a year and often carrying franking credits.CGT discountA 50% reduction in the capital gain you declare, available to individuals who held the asset for more than 12 months.Total returnThe complete return from an investment — income plus capital growth — rather than price movement alone.

Source: Australian Taxation Office