Franking Credits: How Dividend Imputation Works
Australia avoids taxing company profits twice through franking credits: when a company pays tax on its profit and then pays you a dividend, you get a credit for the tax already paid. For low-rate investors — retirees and super funds — that credit can be refunded in cash.
- The mechanic: a fully franked dividend carries a franking credit for the 30% company tax already paid. You declare the grossed-up amount and the credit offsets your tax bill.
- The refund: if your tax rate is below 30% — many retirees, and super funds at 15% or 0% — the credit exceeds the tax owed and the difference is refunded as cash.
- The caution: don't chase franking credits at the expense of diversification or total return, and note imputation has been a recurring target of policy debate.
Cass's retired father lives largely on fully franked dividends and gets a cash refund from the ATO each year — which puzzled Cass until we worked through where that money comes from.
01 What franking credits are
When an Australian company earns a profit it pays company tax — 30% for large companies — before distributing anything to shareholders. Without imputation that profit would be taxed a second time in your hands, so the same dollar of earnings would carry both company tax and personal tax.
Franking credits fix that. A fully franked dividend arrives with a credit for the company tax already paid on it. You include both the cash dividend and the credit in your assessable income — the grossed-up amount — and then subtract the credit from your tax bill. The profit ends up taxed once, at your rate rather than at the company's.
The mechanics are worth holding onto because everything else follows from them. A 30% franked dividend of $700 carries a $300 credit, because $1,000 of company profit was taxed $300 before $700 reached you. Your income for the year includes $1,000, not $700, and your tax on that $1,000 is then reduced by $300.
Dividends are not always fully franked. A company that has paid less than the full company rate — because of foreign earnings, prior losses or offsets — pays partly franked or unfranked dividends, and the credit attached is correspondingly smaller or absent. The franking percentage is stated on the dividend statement, and it is the number that determines what the dividend is actually worth to you.
02 Worked example: the gross-up and refund
Say you receive a $700 fully franked dividend. It carries a $300 franking credit (the company already paid that tax), so your grossed-up income is $1,000. You're taxed on the $1,000 at your marginal rate, then the $300 credit is applied. If your rate is 30%, it washes out exactly. If it's higher, you pay the difference; if it's lower, you're refunded the difference. Put your dividend and rate into the calculator to see your result.
Shows: how a fully franked dividend is grossed up and how the franking credit offsets your tax (or is refunded). Ignores: partially franked dividends, the 45-day holding rule, and the Medicare levy.
On the defaults above, the worked example shows: You owe $90 more after the credit offsets your tax — the credit reduces, but doesn't erase, tax for higher earners.
03 Why retirees and super funds get cash back
Franking credits are refundable in Australia — if your credits exceed your tax bill, the ATO pays you the difference in cash. Most countries with imputation systems do not do this, and it is the single feature that makes franked Australian shares behave differently here than the equivalent holding would anywhere else.
It matters most to low-rate investors. A retiree drawing tax-free super income pays little or no tax, so their franking credits are largely returned as cash rather than merely offsetting a liability. On a $700 fully franked dividend, someone with no tax to pay receives the $700 plus the $300 credit — the full $1,000 of pre-tax company profit.
The same applies inside super. A fund taxed at 15% in accumulation has more credit than tax on a fully franked dividend and receives the balance as a refund into the fund. In pension phase, where the rate is 0%, the entire credit comes back.
This is why fully franked Australian shares are disproportionately held by retirees and by pension-phase super, and why the yield on those shares looks different depending on who is holding them. The grossed-up yield on a fully franked 4% dividend is about 5.7%, and a zero-rate holder actually receives that — while a 47% taxpayer keeps considerably less than the 4%.
04 Franking in super vs in your own name
The same dividend behaves differently depending on where it's held. In pension-phase super (0% tax), the entire franking credit is refunded — the most favourable case. In accumulation super (15%), the credit more than covers the tax, so part is refunded. In your own name, the outcome depends on your marginal rate: below 30% you get a partial refund, at 30% it washes, above 30% you pay the gap. This is one reason franked-dividend portfolios are often held in super by retirees — the low fund tax rate maximises the refund.
05 The cautions
Two cautions, and the first is the more expensive.
Do not let the tax tail wag the investment dog. Chasing high franked yields concentrates a portfolio into a handful of Australian banks and miners, because those are the companies that pay large fully franked dividends. That is a bet on two sectors of one economy, and the diversification and growth given up regularly cost more than the franking credits are worth. Total after-tax return is the measure, not franking credits in isolation — a fully franked 4% yield that does not grow loses to an unfranked 7% total return over any long horizon.
Second, refundability is a policy choice rather than a law of nature. It was the subject of a proposed change at the 2019 federal election, which was abandoned, and it has been debated repeatedly since. The rules are current as described here. But a retirement plan whose viability depends on refundable franking credits continuing indefinitely is carrying a political risk it probably has not priced, and the sensible response is not to avoid franked shares — it is not to build the entire plan on the refund.
There is also a holding-period rule: shares generally must be held at risk for at least 45 days, not counting the days of acquisition and disposal, to claim the credits, with a $5,000 small-shareholder exemption. It exists to stop investors buying just before a dividend and selling just after purely to harvest the credit.
Franking credits are genuinely good policy and genuinely good for retirees — a cash refund for tax already paid, especially in pension-phase super where the rate is zero. The mistake I see is treating them as a strategy in themselves: portfolios stuffed with four banks and two miners 'for the franking', carrying enormous concentration risk to harvest a credit. Hold franked shares, enjoy the refund, but diversify like the credits might change one day — because they've been on the chopping block before.
FAQ
What is a franking credit?
A credit for the company tax already paid on a dividend. A fully franked dividend carries a credit for the 30% company tax, which you offset against your own tax so the profit is taxed once, at your rate.
How do franking credits work?
You include the cash dividend plus the franking credit (the grossed-up amount) in your income, are taxed at your marginal rate, then subtract the credit. Below 30% you're refunded the difference; above 30% you pay the gap.
Why do retirees get franking credit refunds?
Because credits are refundable and retirees often pay little or no tax. A retiree on tax-free super income, or a pension-phase super fund at 0% tax, has more credit than tax owed, so the difference is paid as cash.
Are franking credits better in super?
Often, yes — in pension-phase super (0% tax) the whole credit is refunded, and in accumulation (15%) most of it is. The low fund tax rate maximises the refund compared with holding the shares at a higher personal rate.
Sources
Regulator references
- ATO — Franking credits on your dividendsFranking credits: how the imputation credit is grossed up and offset against tax.Last verified: 2026-06-19
- ATO — You and your sharesHow dividends are taxed in Australia and what must be declared.Last verified: 2026-06-19
- ASIC Moneysmart — SharesHow shares work, the returns they pay, and the risks of holding them.Last verified: 2026-06-19
Calculator unit tests · the assertions this page's worked example is checked against, and their last result
Changelog
- 2026-06-19 — initial publish (new format)
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Jordan Reeves
Founder of Talk Through Wealth. A software engineer for over a decade before turning to retirement planning, Jordan built the projection engine after watching family members get fragmented, country-by-country advice that never reconciled. He writes about retirement the way the engine computes it: month-by-month, lifetime-long, and skeptical of any rule of thumb that hasn't been run through the math.