Franking credits & dividend imputation, explained
Franking credits are one of the most Australian things in investing, and one of the most confusing. The short version: when an Australian company pays tax on its profits and then pays you a dividend from those profits, it passes on a credit for the tax already paid, so the same profit isn't taxed twice. This is called dividend imputation.
Why it exists
A company pays company tax (generally 30%, or 25% for smaller "base rate" companies) on its profit before paying dividends. Without imputation, you'd then pay income tax again on the dividend, taxing the same dollar twice. Franking credits fix that by giving you credit for the company's tax, so profits are effectively taxed once, at your rate.
The gross-up, in one example
Say you receive a $700 fully franked dividend from a company taxed at 30%. Attached is a $300 franking credit (the tax the company already paid). At tax time you declare the grossed-up amount as income. That is the $700 cash plus the $300 credit, which comes to $1,000. You then use the $300 credit against your tax bill:
| Your marginal rate | What happens |
|---|---|
| Below 30% | The credit more than covers the tax, so you get the difference back as a refund |
| Exactly 30% | The credit exactly covers the tax, so there's nothing more to pay |
| Above 30% | You've effectively prepaid 30%, so you top up the rest at your rate |
Because franking credits are refundable, a retiree or low-income investor can receive cash back even if they paid no other tax. That is exactly why franked shares are so popular with Australian retirees.
Franked vs unfranked
A dividend can be fully franked (the company paid full tax on it), partially franked, or unfranked (no credit attached, which is common for companies that earn overseas and pay little Australian tax). Two shares with the same dividend can leave very different amounts in your pocket after tax, depending on franking.
The catches
- The 45-day rule. You generally need to hold the shares "at risk" for at least 45 days around the dividend to claim the credits (a small-shareholder exemption applies under $5,000 of credits a year).
- It's not free money. The grossed-up dividend is taxable income, and chasing franking without looking at total return can be a false economy.
- Overseas apps miss it. Most international investing tools ignore franking entirely, quietly understating your real after-tax return on Australian shares.
Franking credits are applied at your marginal rate. Check yours for 2026-27 with the income tax calculator.
Income tax calculator →Related: capital gains tax explained · CGT calculator. General information only, not tax or investment advice. Check the ATO for your situation.