Franking credits: dividends and the tax already paid

A company earns profit and pays company tax on it. It then hands some of what's left to you as a dividend — which is income, so you'd pay tax on it too. Without a fix, the same profit gets taxed twice: once inside the company, once in your hands.

Australia's fix is dividend imputation: the tax the company already paid is imputed to you, attached to the dividend as a franking credit. Moneysmart's glossary definition is admirably compact: a franking credit is "your share of the tax a company has already paid on the profits you received as a dividend or distribution."

A dividend carrying full credits is fully franked — per the glossary, "a share dividend on which the company has already paid tax", entitling you to a credit for that tax (you'll also see the older name, imputation credit). Partly franked and unfranked dividends carry proportionally smaller or no credits — usually because the company paid less Australian tax on those profits.

The mechanism runs in two steps that feel odd until you see why. Step one, the gross-up: you declare as income not just the cash dividend but the dividend plus its franking credit — the original pre-tax profit, reassembled. Step two, the credit: the same franking amount counts as tax you've already paid.

The net effect is elegant: the profit ends up taxed at your rate, with the company's payment as a deposit. If your marginal rate is higher than the company's, you top up the difference. If it's lower, the deposit was too big — and under Australia's system the excess is refundable, which is why low-rate taxpayers (including many retirees, and super funds at concessional rates) can receive cash refunds of franking credits. The current company and personal rates, and the refund rules, live at the ATO.

Run your own numbers in the calculator below — dividend, franking proportion, and the two rates as you find them — and watch the same cash dividend produce a top-up for one investor and a refund for another. That single demonstration is most of the public debate, decoded.

Because the end point is your marginal rate, one company's dividend nets out differently across its shareholder register. A high-rate taxpayer keeps least — the credit softens but doesn't erase their top-up. A middle-rate taxpayer may find the credit covers most of the bill. A low- or zero-rate taxpayer — a retiree in pension phase, a low-income year, super's concessional environment — can get money back, which is why franked dividends loom so large in Australian retirement portfolios.

This also explains the comparison trap between investments. A franked dividend and an unfranked one with the same headline yield are not the same income: after the credit, the franked one is worth more to most taxpayers. Comparing investments on headline yield alone — or worse, on "grossed-up yield" quoted by whoever's selling — mixes tax positions that aren't yours. Compare after-tax, at your rate, or you're comparing someone else's outcome.

And a nuance worth flagging without the detail: rules exist to stop the credit being harvested by rapid trading around dividend dates — eligibility has conditions (the ATO covers them). If a strategy's entire appeal is the franking, that's precisely when the conditions matter most.

The paperwork side is mercifully simple: dividends and their franking credits go in your tax return, and your dividend statements carry every number the calculator below asks for. Most brokers and registries provide annual summaries; the ATO pre-fills much of it.

The portfolio side needs one guardrail: franking is a feature, not a strategy. A share isn't better because its dividend is franked — it's better or worse as an investment, of which tax treatment is one input. Chasing franking concentrates portfolios into a familiar cluster of big domestic dividend-payers, which is a diversification decision whether or not you meant to make one (the balance lives in Investing basics and ETFs explained).

And because "tax-effective" is one of the great lures of Australian investing, keep the scam-safety reflexes on: schemes sold primarily on tax magic deserve the licensed-adviser check before money moves. Our Savings & investing tool models franking in its after-tax comparisons if you want to see the machinery inside a bigger plan.