Franking credits, explained in plain English
Own Australian shares — directly or through an exchange-traded fund (ETF) — and “franking credits” will follow you everywhere: dividend statements, tax returns, election headlines. They’re one of the most distinctive, and most misunderstood, features of investing in Australia.
The straight answer
A franking credit is a receipt for the 30% tax the company already paid on your dividend, so the same profit isn't taxed twice. Below the 30% bracket you get cash back; at 30% it cancels out; above it you top up the gap.
Below: the mechanics from first principles, what a fully franked dividend is worth at every tax bracket, and the fine print — refunds, the 45-day rule, and ETFs. When you’re done, run your own numbers in the franking credits calculator.
The problem: one profit, taxed twice
A dividend is profit already taxed once — 30% for most large listed companies — yet it’s income to you too. The fix, since July 1987: dividend imputation — the company’s tax is credited to you, the owner.
The point: a franking credit is a receipt for tax already paid for you.
Why one profit would be taxed twice
A company is not a person, but it pays income tax like one. When a company makes a profit, it pays company tax first — 30% for most large listed companies, or 25% for smaller “base rate entity” companies with aggregated turnover under $50 million (ATO, FY2025-26). Whatever is left can be paid out to shareholders as a dividend. Here’s the catch. A dividend is income to you, so you owe income tax on it as well. Without a fix, one dollar of profit would be taxed twice — once inside the company, again in your hands. That’s double taxation.
The 1987 fix: dividend imputation
Australia’s fix, introduced in July 1987, is dividend imputation: the tax the company already paid is “imputed” — attributed — to you, the owner. The voucher that carries it is the franking credit, also called an imputation credit.
The easiest way to think about it
The closest everyday analogy is the tax your employer withholds from your salary. You never see that money, but it isn’t lost — it’s tax paid to the Australian Taxation Office (ATO) on your behalf, and at tax time you settle the difference. A franking credit works the same way: the company has pre-paid 30 cents of tax on each dollar of profit behind your dividend, and at tax time that pre-payment counts as yours.
The gross-up, step by step
Say a company earns $1,000 of profit that belongs to you, pays company tax at 30% — $300, already sent to the ATO — and pays out the rest. You receive a $700 cash dividend with a $300 franking credit attached ($700 × 30÷70 = $300).
At tax time, three things happen:
- $700 dividend lands with the $300 franking credit attached.
- Gross-up — you declare the dividend plus the credit: $1,000, not $700, restoring the full pre-tax profit.
- Tax at your rate — income tax is worked out on the $1,000 at your marginal rate, the rate on your last dollar of income.
- Credit applied — the $300 the company already paid comes off your bill. You top up the difference — or get money back.
Not every dividend carries the full credit — the franking percentage is on your dividend statement:
| Dividend type | Credit attached |
|---|---|
| Fully franked, 30% company | dividend × 30÷70 |
| Fully franked, 25% base rate entity | dividend × 25÷75 — a smaller credit (ATO, FY2025-26) |
| Partly franked, e.g. 50% | half the full credit |
| Unfranked | none |
Shortcut: the franking credits calculator does this gross-up for you.
What a $700 dividend is worth at every bracket
The end result: franked profits are taxed at your rate, not the company’s. Here’s the same $700 fully franked dividend ($1,000 grossed-up) at each marginal rate for FY2026-27 — the year that began 1 July 2026, when the lowest rate fell from 16% to 15% (ATO, FY2026-27). The Medicare levy (2% for most taxpayers) is left out to keep the mechanics clear.
| Marginal rate (FY2026-27) | Tax on $1,000 | After $300 credit | You keep |
|---|---|---|---|
| 0% — taxable income under $18,200, e.g. a retiree whose super pension doesn’t count as taxable income | $0 | $300 refunded | $1,000 |
| 15% — $18,201 to $45,000 | $150 | $150 refunded | $850 |
| 30% — $45,001 to $135,000 | $300 | $0 — exactly cancels | $700 |
| 37% — $135,001 to $190,000 | $370 | $70 to pay | $630 |
| 45% — over $190,000 | $450 | $150 to pay | $550 |
Rates and thresholds: ATO resident tax rates, FY2026-27. Excludes the 2% Medicare levy. Not sure of your bracket? Check the income tax calculator.
At a 30% marginal rate, the credit exactly cancels the tax. Either side:
Below 30%
- The credit outweighs the tax owed
- Cash comes back from the ATO
Above 30%
- You top up the gap between the company’s rate and yours
- Never tax-free for higher earners — just not double-taxed
Your shares, your bracket, your numbers. The franking credits calculator does the gross-up for any dividend, franking percentage and income.
Run your own numbers →Why some investors get cash refunds
The 0% row surprises people: no tax owed, yet the ATO sends $300 anyway. It's been the law since 1 July 2000 — excess credits come back as cash. Super funds are the big winners: 15% tax on earnings while you're working, 0% on assets paying a retirement pension, so their credits routinely beat their tax bill.
Not a loophole — how refunds became law
It’s how the system has worked for a quarter of a century. When imputation began in 1987, credits could reduce your tax bill to zero but no further; any excess was lost. From 1 July 2000 the law changed to make excess franking credits fully refundable in cash for resident individuals and super funds (ATO), so franked income is taxed at the shareholder’s own rate even when that rate is below 30% — including zero. Whether refundability is good policy has been debated in elections since; the mechanics above are simply the law as it stands.
Who the refunds matter for
The refund case matters most for retirees on modest taxable incomes and for super funds. A super fund pays 15% tax on earnings while you’re working and 0% on assets supporting a retirement pension, so its franking credits routinely exceed its tax bill and come back as refunds. (Curious how money gets into super? See the salary sacrifice super calculator.)
The 45-day rule
Hold the shares “at risk” for 45 days to claim the credits — though most everyday investors are exempt.
How the holding period rule works
To stop people buying shares just before a dividend, harvesting the credit and selling straight after, the law includes a holding period rule, usually called the 45-day rule (ATO). To claim the credits, you must hold the shares “at risk” for at least 45 continuous days — 90 for certain preference shares — not counting the day you bought or sold. “At risk” means genuinely exposed to the share price: hedging the risk away with derivatives stops the clock.
The small shareholder exemption
Most everyday investors never need to think about this, thanks to the small shareholder exemption: if your total franking credit entitlement for the year is under $5,000 — roughly $11,600 of fully franked dividends — the holding period rule doesn’t apply to you (ATO). A separate “related payments rule” catches arrangements where you must pass the benefit of a dividend to someone else; again, rare. Fail the tests and the credits on those shares simply can’t be claimed.
Where it shows up in your tax return
| Item 11 label | What goes there |
|---|---|
| S | unfranked amounts |
| T | franked amounts |
| U | franking credits |
Dividends live at item 11 of the individual tax return (ATO) — in practice you rarely type any of it, because myTax pre-fills the amounts.
Pre-fill, checking, and how the offset works
Share registries report dividends to the ATO, and myTax pre-fills the amounts; your job is checking them against your dividend statements, especially for dividends paid late in June. The credit works as a tax offset: it cuts tax payable dollar-for-dollar, with any excess refunded. If you don’t need to lodge a return at all, the ATO’s short refund of franking credits application gets you the refund, online or by phone.
Franking credits and ETFs
You don’t need to pick individual shares — credits flow through ETFs too.
Australian-shares ETF
- Holds companies paying franked dividends — credits flow through
- Rarely 100% franked — a franked/unfranked blend
International-shares ETF
- Global companies don’t pay Australian company tax
- No franking credits attached
Why credits flow through a trust
An ETF is legally a trust, and trusts pass income through to investors with its tax character intact — so when an ETF holds Australian companies paying franked dividends, the credits flow through to you with each distribution (ATO).
Your AMMA statement, decoded
The paperwork arrives once a year as an AMMA statement — an AMIT member annual statement, where AMIT stands for attribution managed investment trust, the tax regime most Australian ETFs use. It shows your share of franked income and franking credits, with labels matching the tax return, and most providers report it for pre-fill. Two practical notes: credits flow only from the Australian shares an ETF holds — global companies don’t pay Australian company tax, so international ETFs carry no franking — and a broad Australian-shares ETF distributes a blend of franked and unfranked income, so its distributions are rarely 100% franked.
- Full guide: investing in ETFs in Australia — how ETFs work end to end: CHESS versus custodial ownership, spreads, distributions.
- Or start at the investing hub.
A word of perspective
Credits are a tax feature, not free money. Weigh the whole picture:
- Diversification, fees, timeframe — the fundamentals still decide.
- Competing uses for the money — the questions in pay off the mortgage or invest?, its companion mortgage vs invest calculator, and debt recycling, explained.
Franking credits make Australian dividends more valuable than the headline yield suggests — but they’re a feature of the tax system, and never a reason on their own to buy a share. Returns from shares are not guaranteed, and past performance is no indicator of future performance.
Your call
Never buy a share for the franking credit — buy it because you'd want it unfranked, and treat the credit as the bonus it is. And if you're on a low tax rate holding Australian shares, make sure you're actually claiming: the refund is real money, and the ATO won't chase you to take it. Check your dividend statements against the calculator — it takes two minutes.
Frequently asked questions
Are franking credits a refund of tax I’ve already paid?
No. A franking credit represents tax the company already paid on its profit — 30% for most large listed companies. It comes to you with the dividend so the same profit isn’t taxed twice; you pay tax on the grossed-up amount at your marginal rate, minus the credit.
What do fully franked, partly franked and unfranked mean?
Fully franked means Australian company tax was paid on all the profit behind the dividend, so the maximum credit is attached. Partly franked means only some of it was. Unfranked means no credit at all: you pay tax on the cash at your marginal rate. Your dividend statement shows the franking percentage.
I pay no income tax — are franking credits worth anything to me?
Yes. Since 1 July 2000, excess franking credits have been refundable in cash. If your credits are bigger than the tax you owe, the ATO refunds the difference — even if you owe no tax at all. If you don’t need to lodge a tax return, the ATO has a short refund-of-franking-credits application you can use instead.
Do ETFs pass franking credits on to me?
Yes, where the ETF holds Australian companies that pay franked dividends. An ETF is a trust, so the credits flow through to unit-holders with each distribution. Your annual AMMA tax statement shows the amount you can claim. ETFs holding international shares don’t generate franking credits, because those companies don’t pay Australian company tax.
What is the 45-day rule?
To claim franking credits you generally must hold the shares at risk for at least 45 continuous days (90 for certain preference shares), not counting the day you bought or sold. There is a small shareholder exemption: if your total franking credits for the year are under $5,000, the holding period rule doesn’t apply to you.
Sources
- ATO — Refund of franking credits for individuals (refundability from 1 July 2000; eligibility)
- ATO — Franking credit trading (holding period & related payments rules) (45/90 days; $5,000 small shareholder exemption)
- ATO — Tax rates for Australian residents (FY2026-27 brackets, incl. 15% rate from 1 July 2026)
- ATO — Company tax rates (30% full rate; 25% base rate entities under $50m turnover)
- ATO — myTax instructions: dividends (item 11, labels S/T/U)
- ATO — Exchange traded funds (AMMA statements; franking credits in distributions)
Figures checked against the ATO on 2 July 2026. Tax law changes; confirm current rates with the ATO before acting.
General information only — this is education, not financial, tax or investment advice, and it doesn’t consider your personal circumstances. Talk to a registered tax agent or licensed financial adviser before making decisions.