Australia's dividend imputation system is one of the most generous in the world - and one of the most misunderstood. Here's a complete reference on how franking credits work, who benefits most, and what changed in 2025.
Before we start
You know how your employer takes tax out of your pay before it hits your account - and then at tax time, if they took too much, the ATO refunds you the difference?
Franking credits work exactly the same way. Except instead of your employer, it's a company you've invested in. And instead of your wages, it's your share of the company's profits.
The company earns money, pays 30% tax on it, then distributes what's left to you as a dividend. Attached to that dividend is a receipt - the franking credit - showing the ATO already took 30%. When you lodge your return, the ATO credits you for what was already paid. If your personal tax rate is lower than 30%, they send you the difference in cash.
That's it. Same mechanic everyone already knows - just one step upstream.
Last updated: April 2026 · ATO-aligned · General information only 11 min read
In this article
Before Australia introduced the dividend imputation system in 1987, company profits were taxed twice. First, the company paid corporate tax on its earnings. Then, when those after-tax profits were distributed to shareholders as dividends, the shareholders paid income tax on the dividend income again. The same dollar was taxed once at the company level and again at the individual level.
The imputation system - and the franking credits that come with it - was designed to eliminate this double taxation. The idea is conceptually simple: the company acts as a tax collector on behalf of its shareholders. When the company pays tax, it pays it as a pre-payment on the shareholder's behalf. When the dividend is distributed, the shareholder gets credit for that pre-payment and only pays the difference between the company's rate and their own marginal rate - or receives a refund if the company paid too much.
A useful parallel: it works similarly to PAYG withholding on wages. When your employer withholds tax from your pay, you don't pay that amount again when you lodge your return - you reconcile it. Franking credits work the same way, except the "employer" is the company you've invested in, and the "pre-payment" is the corporate tax it paid on your behalf.
When an Australian company pays corporate tax at 30%, it records the tax paid in a franking account. When it distributes a dividend to shareholders, it can attach franking credits to that dividend - up to the amount of tax it has already paid on those profits. The ratio of the credit to the cash dividend reflects the corporate tax rate.
For a company paying tax at the standard 30% rate: for every $70 of cash dividend paid, it can attach a $30 franking credit. The shareholder receives $70 in cash plus $30 in credits - representing the full $100 of pre-tax profit the company earned.
The full flow - from company profit to shareholder tax
| Company earns pre-tax profit | $100 |
| Company pays 30% corporate tax | −$30 |
| Cash dividend paid to shareholder | $70 |
| Franking credit attached | $30 |
| Grossed-up dividend (taxable income) | $100 |
| Tax owed at 32.5% marginal rate | $32.50 |
| Less: franking credit offset | −$30.00 |
| Additional tax payable | $2.50 |
| Total tax on $100 of company profit | $32.50 (not $62.50) |
Without the imputation system, the same investor would pay $30 corporate tax plus $22.75 personal tax on the $70 dividend = $52.75 total. With franking credits: $32.50 total. The credit eliminates double taxation and ensures tax is paid once - at the shareholder's marginal rate.
When you receive a franked dividend, the amount that goes into your tax return is not just the cash you received - it's the grossed-up amount, which includes both the cash dividend and the franking credit. This is the number your marginal tax rate is applied to.
For a fully franked dividend at the 30% corporate tax rate, the gross-up formula is:
Grossed-up dividend = Cash dividend ÷ (1 − corporate tax rate)
Example: $700 cash dividend = $700 ÷ 0.70 = $1,000 grossed-up dividend
Franking credit = $1,000 − $700 = $300
This is why franked dividends are worth more than their face value. A $700 cash dividend from a fully franked source isn't $700 of income - it's $1,000 of income with a $300 tax credit attached. Depending on your marginal rate, that credit either reduces the additional tax you owe, eliminates it entirely, or results in a cash refund from the ATO.
Tax outcome on a $700 fully franked dividend ($300 franking credit) - by marginal rate
| Investor type | Marginal rate | Tax on $1,000 | Less: $300 credit | Net outcome |
|---|---|---|---|---|
| Retiree / low income | 0% | $0 | −$300 | $300 cash refund |
| Lower income earner | 19% | $190 | −$300 | $110 cash refund |
| Middle income earner | 32.5% | $325 | −$300 | $25 additional tax |
| Higher income earner | 37% | $370 | −$300 | $70 additional tax |
| Top marginal rate | 45% | $450 | −$300 | $150 additional tax |
| Super fund (accumulation phase) | 15% | $150 | −$300 | $150 cash refund |
Rates exclude Medicare Levy for simplicity. Based on 2025–26 resident individual marginal rates.
The table above tells the story clearly. The benefit of franking credits varies dramatically depending on your tax rate - and that variation is the most important thing to understand when thinking about how franked dividends fit into a portfolio.
Who benefits most
Who benefits least
Australia's imputation system is globally unusual
Most countries tax dividends twice - once at the corporate level and again at the individual level. Australia is one of very few countries that operates a full imputation system, meaning corporate tax is genuinely treated as a pre-payment of the shareholder's personal tax. This makes fully franked Australian dividends considerably more valuable to resident investors than equivalent dividends from overseas companies, which carry no franking credits.
Since 2001, excess franking credits are refundable in cash. This is a uniquely powerful feature of the Australian system: if your franking credits exceed your total tax liability - including from all income sources, not just dividends - the ATO pays you the difference as a cash refund.
This applies both through your tax return and, from 2025, through an automatic refund process for eligible individuals over 60.
What changed in 2025 - automatic refunds for over 60s
From the 2025 tax year, the ATO will automatically refund franking credits to eligible individuals over 60 who meet the qualifying conditions - no application required. If eligible, the ATO notifies you in June and issues the refund from mid-July, with most payments processed by August. You can opt out by calling the ATO. If you don't qualify for automatic processing, you can still apply manually from 1 July via myGov or by phone.
To be eligible for a cash refund you must: be an Australian resident, receive franked dividends either directly or through a trust or partnership, and have a total tax liability (after other offsets) that is less than the value of your franking credits. You must also meet the holding period rules covered below.
Not all dividends carry franking credits, and when they do, it's not always the full 30%. The level of franking reflects how much Australian corporate tax the company has actually paid on the profits being distributed.
| Type | What it means | Common examples |
|---|---|---|
| Fully franked | Company paid full 30% corporate tax on these profits. Full credit attached. | CBA, BHP, Westpac, ANZ, NAB - major established Australian companies with domestic earnings |
| Partially franked | Company paid tax on part of the profit. Partial credit attached - e.g. 50% franked. | Companies with a mix of domestic and overseas earnings, or that have used tax deductions to reduce their Australian tax liability |
| Unfranked | No Australian corporate tax paid on these profits. No credit attached - dividend taxed in full at your marginal rate. | Many international companies listed in Australia, REITs distributing income from tax-exempt sources, and companies paying dividends from overseas profits |
When comparing dividend yields, it's worth adjusting for franking to get a like-for-like comparison. A 4% fully franked yield is meaningfully more valuable than a 4% unfranked yield to most Australian resident investors - the tax-adjusted yield can be significantly higher once the franking credit is factored in.
The ATO has integrity rules to prevent investors from buying shares just before a dividend, collecting the franking credit, then immediately selling. The main rule is the 45-day holding rule: to be eligible to use the franking credit, you must hold the shares "at risk" for at least 45 days (not counting the day of purchase or sale). For preference shares, the requirement is 90 days.
"At risk" is important - if you've hedged or reduced your exposure to the shares during the holding period (for example through a short position or options), the held period may not count.
Small investor exemption - the $5,000 threshold
If your total franking credit entitlement for the year is below $5,000, the 45-day holding rule does not apply - you only need to satisfy the related payments rule. This exempts most retail investors with modest share portfolios from worrying about holding periods. The $5,000 threshold is roughly equivalent to receiving a fully franked dividend of about $11,650 (at 30% corporate tax rate). If your total franking credits are below this, you're generally not affected by the rule.
Super funds are among the biggest beneficiaries of the Australian imputation system. In accumulation phase, the fund's earnings are taxed at 15% - meaning a $300 franking credit on a $1,000 grossed-up dividend generates a $150 cash refund from the ATO (since the fund's tax liability is only $150 but it received $300 in credits).
In pension phase, the fund pays 0% tax on earnings. Every dollar of franking credit is returned in full as a cash refund - making fully franked Australian shares one of the most tax-efficient assets available to a self-funded retiree.
This is one reason why Australian equities - particularly the major banks and large-cap industrials - have historically been overweighted in Australian self-managed super funds relative to their size in the global market. The franking credit advantage is genuinely significant and makes domestic stocks comparatively more attractive to Australian super investors than to overseas ones.
Division 296 - the $3M super balance threshold from 2025
From 1 July 2025, an additional 15% tax on earnings applies to super balances above $3 million. For high-balance funds that have relied heavily on franking credit refunds from Australian equities, this changes the calculus somewhat at the very top end - though the advantage of franking credits remains substantial for balances below the threshold. If your total super balance is approaching $3 million, seek specific advice on how the new tax interacts with your investment strategy.
For most people building a long-term investment portfolio, franking credits are a meaningful but secondary consideration - the primary decision is asset allocation, diversification, and cost. But they're worth understanding for a few specific planning reasons.
The franking credit advantage is real and valuable - particularly in retirement. But it's not large enough to justify concentrating your portfolio in Australian stocks at the expense of global diversification.
Do I need to declare franking credits in my tax return?
Yes. You declare the grossed-up dividend amount as income (cash dividend plus franking credit) and claim the franking credit as a tax offset. The ATO pre-fills this information for most investors by late July each year using data from dividend statements. It's worth checking the pre-fill is accurate before lodging, particularly if you received dividends from multiple sources or through a trust.
What is a franking account?
A company's franking account is the running balance of Australian corporate tax it has paid and is therefore available to pass on to shareholders as franking credits. When the company pays tax, the franking account is credited. When it pays a franked dividend, the franking account is debited by the value of credits attached. A company with a strong franking account balance can pay fully franked dividends; one with a low balance may pay partially franked or unfranked dividends.
Can ETFs pass on franking credits?
Yes - Australian equity ETFs that hold franked dividend-paying stocks pass the franking credits through to unit holders as part of their distributions. The amount depends on the underlying holdings and how much of their dividends were franked. Australian broad-market ETFs typically pass on a meaningful level of franking - check the fund's distribution statements or product disclosure statement for the historical franking percentage.
Why do some Australian companies pay unfranked dividends?
Usually because the profits being distributed weren't subject to Australian corporate tax. This is common for companies that earn most of their income overseas (where they've paid foreign rather than Australian tax), companies using significant tax deductions or losses that reduced their Australian tax payable, or listed trusts and REITs that pass through trust income rather than corporate profits. Unfranked dividends aren't inferior per se - they simply mean the company wasn't paying Australian tax on those particular profits.
Does salary sacrifice into super affect my franking credit refund?
Not directly - franking credits are a function of the dividends you receive and your personal tax liability, not your super contributions. However, salary sacrificing more into super reduces your taxable income, which can lower your marginal rate and increase the chance that your franking credits exceed your tax liability - potentially turning some credits into a cash refund rather than just an offset. The interaction is indirect but worth being aware of if you're close to a threshold.
Model your dividend income in Canwi
In Canwi, dividend income from shares flows through to your assessable income calculation, and the tax impact - including franking credits - is reflected in your overall tax position. You can see how adding a share investment affects your annual cashflow, tax bill, and net worth trajectory over time.
General information only. This article provides general educational information about franking credits and the Australian dividend imputation system. Individual tax outcomes depend on your specific circumstances, income level, and investment structure. Always verify with the ATO and consult a registered tax agent before making investment or tax decisions.