Written byFranking credits are tax credits attached to Australian dividends that pass on company tax already paid, so shareholders are not taxed twice on the same profit.
Also known as: imputation credits, franking credit, dividend imputation
Key points
- A fully franked dividend carries credits for all the company tax paid on that profit; a partly franked one covers only part.
- You declare the cash dividend plus the credit as income, then subtract the credit from the tax you owe.
- If your credits come to more than your tax bill, the ATO can refund the difference once your return is assessed.
- Unfranked dividends carry no credit, usually because the profit was earned overseas or was not taxed in Australia.
- Holding period rules apply, so credits can be denied if you buy shares just before a dividend and sell straight after.
How franking credits work
Australia uses a dividend imputation system. When an Australian company makes a profit it pays company tax, and when it hands what is left to shareholders it can attach a credit for the tax already paid. Without that credit the same profit would be taxed once inside the company and again in your hands.
At tax time you gross up: declare the cash you received plus the credit as income, work out the tax on that larger figure, then subtract the credit. If your marginal rate is higher than the company rate you top up the difference, and if it is lower you finish in front. Your dividend statement and the portfolio report from your broker show the credit attached to each payment.
Who benefits most from franking credits
The lower your tax rate, the more a franking credit is worth. A retiree drawing a pension, or an investor with little other income, can find the credit is larger than the tax owed on the dividend, and the surplus comes back as a refund after lodging.
Investors on higher marginal rates still benefit, they simply pay the gap between their own rate and the company rate instead of tax on the full amount. Super funds and charities claim credits too, which is one reason franked Australian shares turn up so often in Australian retirement savings.
Rules and limits to know
Credits are not automatic. Holding period rules require you to hold the shares at risk for a set time around the dividend, which stops people buying in purely to collect the credit. Small shareholders under a set amount of credits each year are generally exempt from that test.
Franking percentages vary between companies and between payments, and a business with mostly overseas earnings may frank very little. Remember that credits reduce tax owed; they are not cash you can spend before you lodge. Check the ATO's guidance or your accountant for your own position.
Example
Mia receives a fully franked dividend of $700 from an Australian bank. Her dividend statement shows the franking credit attached to that payment, so she declares the cash and the credit together as income rather than just the $700. The credit is then subtracted from the tax calculated on that grossed-up figure. Because Mia is retired and pays little tax, the credit is worth more than the tax owed and the surplus is refunded after she lodges her return.
Not to be confused with
- Credit
- credit in lending means money you have borrowed, while a franking credit is an offset against tax you owe
Frequently asked questions
How do franking credits work?
The company pays tax on its profit, then passes you a credit for that tax along with the dividend. You add the credit to the cash dividend, declare the total as income, and take the credit off the tax you owe. If the credit is bigger, the difference is refunded.
Do I get money back from franking credits?
You can. If the credits attached to your dividends are worth more than the tax on your income, the ATO refunds the excess once you lodge your return. That happens most often for retirees and people on modest incomes rather than higher earners.
What is the difference between franked and unfranked dividends?
A franked dividend carries credits for company tax already paid in Australia, so the same profit is not taxed twice. An unfranked dividend carries none, usually because the profit was earned or taxed overseas, so the full amount is taxed in your hands.
Do franking credits apply to super?
Yes. Super funds hold Australian shares and claim the credits against tax on their earnings, and excess credits can be refunded to the fund. In a self-managed fund the trustees see this in the annual return. Treatment differs by fund type, so check with your fund.
Are franking credits worth chasing?
They are worth understanding rather than chasing. A credit is only worth what it saves you in tax, and you have to meet the holding period rules to claim it. Buying shares purely to collect a credit around a dividend date can leave you worse off overall.
Related terms
Shareholder
A shareholder is a person or entity that owns shares in a company, giving them a share of its profits and value while the directors run the business.
Read definitionATO
The ATO is the Australian Taxation Office, the national tax authority that collects income tax, GST and PAYG, administers superannuation rules, issues rulings and enforces compliance.
Read definitionCompany
A company is a separate legal entity, formed under the Corporations Act 2001, that can own property, borrow and be sued in its own name, independently of its shareholders.
Read definitionPortfolio
A portfolio is a grouped set of loans, leases and the assets behind them, held by one lender or lessor and managed together for reporting, risk and performance.
Read definitionPty Ltd company
A Pty Ltd company is a private company with its own legal identity that cannot offer shares to the public and limits shareholders' liability to their share capital.
Read definitionCredit
Credit is the ability to borrow money or receive goods and services now in return for a promise to repay later, usually with interest and fees on agreed terms.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.