How Franking Credits Actually Work (And Why They Matter for Your Returns)

If you've been investing in Australian shares for any length of time, you've probably come across the term "franking credits." Maybe your broker mentioned them, maybe you saw them on a dividend statement, or maybe you've just been nodding along and quietly wondering what they actually are.

You're not alone. Franking credits are one of those concepts that sounds more complicated than it is, and most explanations don't help by loading them up with tax jargon from the first sentence.

So let's try a different approach.

Start with the problem they were designed to solve

Back before 1987, Australian companies paid tax on their profits, and then when they distributed those profits to shareholders as dividends, shareholders paid tax on them again. The same money was being taxed twice: once at the company level, and once in your hands.

The dividend imputation system was introduced to fix exactly that. The idea is straightforward: if a company has already paid tax on its profits, shareholders should get credit for that tax when they receive a dividend. You shouldn't be taxed twice on the same dollar.

That credit is what we call a franking credit, sometimes also called an imputation credit.

How it works in practice

Let's walk through a simple example.

Say you own shares in a company that earns a profit and decides to pay you a $70 dividend. Before paying that dividend, the company paid 30% corporate tax on its profits. So on the $100 of profit that generated your $70, the company already paid $30 to the ATO.

When you receive your $70 dividend, it comes with a $30 franking credit attached. Together, that's $100 of "grossed-up" income.

When you lodge your tax return, you declare the full $100 as income, but you also get to use that $30 franking credit to offset your tax bill.

If your marginal tax rate is 32.5%, you'd owe $32.50 in tax on that $100. But with the $30 credit, you only actually pay $2.50. The company's tax payment counts towards yours.

If your marginal tax rate is lower than 30%, say you're in the 19% bracket, the credit exceeds your tax liability on that income and you get the difference back as a refund. That refund is real money deposited into your bank account, not just a reduction on a future bill. It's one of the main reasons retirees and lower-income investors often structure their portfolios heavily towards fully franked dividend payers.

Fully franked vs partially franked vs unfranked

Not all dividends carry franking credits, and not all that do are fully franked.

A fully franked dividend means the company paid the full 30% corporate tax rate on the profits behind that dividend. You get the maximum credit.

A partially franked dividend means the company only paid tax on part of the profits, often because some income came from overseas or was sheltered. The credit is proportional.

An unfranked dividend means no corporate tax was paid on those profits, so there's no credit to pass on. You pay your full marginal rate on it.

Most large ASX companies, the banks, the big miners, the major retailers, pay fully franked dividends. It's one of the reasons income-focused investors often lean towards the ASX over international markets.

What the franking percentage tells you

When you look at a dividend announcement, you'll often see something like "100% franked" or "70% franked." That percentage tells you what proportion of the dividend carries a tax credit.

It's worth paying attention to when you're comparing dividend yields. Two companies might offer the same cash dividend, but the one paying fully franked dividends is actually worth more to an Australian taxpayer because of the tax offset that comes with it.

This is why comparing gross dividend yields, which factor in the franking credit, gives you a more accurate picture than just looking at the cash amount.

How this shows up in FinTarget

When you record dividends in FinTarget, you can log the franking percentage alongside the payment. The dividends module tracks this across your portfolio and by financial year, so when you're pulling together your tax information at the end of June, you can see exactly what credits you've accumulated and from which holdings.

It's a small thing, but it's the kind of detail that gets lost when you're tracking everything in a spreadsheet and makes a real difference when you're sitting down with your accountant or lodging your own return.

A few things worth knowing

Franking credits are tied to the Australian tax system, so they're only available to Australian tax residents. If you're a non-resident, dividends are still paid but the franking credit component works differently.

The 45-day rule is also worth being aware of. To claim franking credits, you generally need to have held the shares "at risk" for at least 45 days around the ex-dividend date. This is an anti-avoidance rule designed to stop people from buying shares purely to harvest the credit and selling immediately after. If you're a long-term investor, this rule almost certainly doesn't affect you, but it's worth knowing it exists.

Franking credits are reported on your dividend statement and on your annual tax statement from your broker. They'll appear on your pre-filled tax return if you use myTax.

The short version

Franking credits exist to stop you from being taxed twice on the same company profit. When a company pays you a dividend from profits it's already paid tax on, it passes you a credit for that tax. You use the credit to offset your personal tax bill, and if the credit exceeds what you owe, you get the difference back as a cash refund.

For Australian investors focused on income, they're not a nice-to-have. They're a meaningful part of the total return picture, and they're worth tracking properly.