Franking Credits Explained: A Plain-English Guide for Australian Share Investors

Franking credits are one of those things that every Australian investor benefits from but few actually understand properly. If you own shares in BHP, CBA, Telstra, or pretty much any profitable ASX company, you're getting franking credits attached to your dividends. And they can make a real difference to your after-tax return.

Here's how they actually work.

What Are Franking Credits?

When an Australian company earns a profit, it pays company tax at 30% (or 25% for base rate entities). When it then pays a dividend to you from that after-tax profit, the company has already paid tax on that money.

Franking credits represent the tax the company has already paid. They get attached to the dividend so that you, the shareholder, get credit for tax that's already been handed to the ATO.

This system is called dividend imputation, and Australia is one of the few countries in the world that uses it. It prevents the same income being taxed twice: once in the company's hands and again in yours.

A Simple Example

CBA earns $1.00 of profit and pays 30 cents in company tax, leaving 70 cents. It pays the 70 cents to you as a dividend, with a 30-cent franking credit attached.

On your tax return, you report:

Dividend received: $0.70
Franking credit: $0.30
Grossed-up income: $1.00

You pay tax on the full $1.00 at your marginal rate. But you get a $0.30 tax offset for the franking credit. If your marginal rate is 30%, you owe 30 cents in tax, minus the 30-cent franking credit, and your net tax on that dividend is zero.

That's the whole idea. The company paid 30% tax, your marginal rate is 30%, so there's nothing more to pay.

Fully Franked vs Partly Franked vs Unfranked

Not all dividends come with the same level of franking.

Fully Franked

The company paid the full 30% (or 25%) company tax rate on the profits used to pay the dividend. Most major ASX companies pay fully franked dividends: CBA, BHP, WES, CSL, TLS.

A fully franked dividend of $0.70 carries a franking credit of $0.30 (at the 30% rate), meaning the grossed-up amount is $1.00.

Partly Franked

Some of the profit was taxed and some wasn't. This happens when a company has foreign income (which was taxed overseas, not in Australia) or tax losses that offset part of its taxable income.

For example, a 50% franked dividend of $0.70 would carry a franking credit of $0.15, with a grossed-up amount of $0.85.

Unfranked

No company tax was paid on this portion. This is common for companies with significant overseas earnings, or those using tax losses to reduce their Australian tax bill. Some REITs and infrastructure funds pay largely unfranked distributions.

How Franking Credits Affect Your Tax Return

This is where it gets practical. Here's a full worked example.

Scenario

You own 1,000 shares in Wesfarmers (WES). They pay a fully franked interim dividend of $1.03 per share. The company tax rate is 30%.

Step 1: Calculate the dividend received

1,000 shares x $1.03 = $1,030.00

Step 2: Calculate the franking credit

Franking credit = Dividend x (Company tax rate / (1 - Company tax rate))

$1,030 x (0.30 / 0.70) = $1,030 x 0.4286 = $441.43

Step 3: Calculate your grossed-up (taxable) income

$1,030.00 + $441.43 = $1,471.43

Step 4: Calculate tax at your marginal rate

Say your marginal rate is 30% (plus 2% Medicare levy = 32%).

Tax on the grossed-up amount: $1,471.43 x 0.32 = $470.86

Step 5: Subtract the franking credit

$470.86 - $441.43 = $29.43 tax payable

So on a $1,030 dividend, you only owe $29.43 in additional tax. Your effective tax rate on the dividend is about 2.9%.

Without the franking credit, you'd owe $329.60 in tax. Franking credits just saved you $300.

What If Your Tax Rate Is Lower Than 30%?

This is where it gets even better. If your marginal tax rate is lower than the company tax rate, the excess franking credits come back to you as a tax refund.

Say you're a retiree with a marginal rate of 0% (taxable income under $18,200). Using the same WES example:

Tax on $1,471.43 at 0% = $0
Franking credit offset: $441.43
Refund: $441.43

You'd receive the $1,030 dividend plus a $441.43 refund from the ATO. That's $1,471.43 in total, which is the full pre-tax profit the company earned. Zero tax leakage.

This is why retirees and low-income earners love fully franked dividends. It's also why franking credit policy is such a hot political topic in Australia.

What If Your Tax Rate Is Higher Than 30%?

If you're on the top marginal rate of 45% (plus 2% Medicare levy = 47%), you'll owe additional tax:

Tax on $1,471.43 at 47% = $691.57
Franking credit offset: $441.43
Additional tax: $250.14

You still benefit from the franking credit. You just don't benefit as much as someone on a lower rate.

The 45-Day Holding Rule

The ATO isn't going to let you game the system. There's a rule called the 45-day holding rule (or the "holding period rule") designed to stop people from buying shares just before the dividend, collecting the franking credits, and selling straight after.

The rules:

You must hold the shares "at risk" for at least 45 days (not counting the buy and sell dates) during the period starting 45 days before the ex-dividend date and ending 45 days after.
"At risk" means you haven't hedged your position. If you own the shares but also hold a put option that protects against losses, the days you're hedged don't count.
There's an exemption for individuals with total franking credits of $5,000 or less in a financial year. If your franking credits are under this threshold, the 45-day rule doesn't apply to you.

For most buy-and-hold investors, this rule is a non-issue. You already hold the shares well beyond 45 days. It mainly catches short-term traders trying to skim franking credits.

ETF Distributions and Franking Credits

If you invest through ETFs rather than individual shares, you still receive franking credits, but they work slightly differently.

When an Australian equity ETF (like VAS, A200, or IOZ) holds shares in CBA, BHP, and others, those companies pay franked dividends to the ETF. The ETF then passes through the franking credits to you as part of its distribution.

Your annual distribution statement from the ETF manager (Vanguard, BetaShares, iShares) will break down the distribution into:

Franked dividend component
Unfranked dividend component
Franking credits
Other components (capital gains, return of capital, foreign income)

The franking credits are reported on your tax return the same way as if you'd received them directly from the company.

One wrinkle: Because ETFs rebalance and trade their holdings, they sometimes don't hold shares for the full 45 days. In that case, the ETF may not be able to pass through all the franking credits. This is rare for large index ETFs but worth being aware of with actively managed funds.

How Franking Credits Appear on Your Tax Return

On your individual tax return, franking credits show up in two places:

Item 11 (Dividends): You report the total franked dividends, unfranked dividends, and franking credits received. Your broker's annual tax statement and your ETF distribution statements give you these figures.
Tax offset section: The total franking credits appear as a tax offset, which directly reduces your tax payable.

If the offset exceeds your tax liability (because your income is low enough), the excess is refunded to you.

Getting the Numbers

Your broker and fund managers are required to provide you with annual tax statements by the end of October each year. These statements list:

Total dividends received
Franked amount
Unfranked amount
Franking credits attached

If you're using a tax agent or online tax software, you can usually pre-fill this data directly from the ATO's records (which your broker reports to).

Common Mistakes with Franking Credits

Forgetting to include them on your tax return. If you report the dividend but not the franking credit, you miss out on the tax offset. You'll pay more tax than you should.

Double-counting DRP dividends. If you're on a DRP, you still receive the dividend (it's just reinvested). You still need to report it and the attached franking credits.

Ignoring the 45-day rule when trading around ex-dates. If you're a frequent trader and your franking credits exceed $5,000, the ATO can deny the credits for shares held less than 45 days.

Not reconciling with broker statements. The figures in your portfolio tracker or spreadsheet should match your broker's annual tax statement. If they don't, something's wrong.

Tracking Franking Credits with SavvyPortfolio

Keeping track of franking credits across multiple stocks and financial years is genuinely annoying if you're doing it by hand. SavvyPortfolio tracks dividends and their associated franking credits automatically, giving you a clear breakdown of:

Total dividends received (franked and unfranked)
Total franking credits for the financial year
Per-stock dividend history
Grossed-up income for tax reporting

When tax time arrives, you have the numbers ready to go. No digging through emails for distribution statements.

The Bottom Line

Franking credits are a genuine tax advantage for Australian investors. They reduce or eliminate double taxation on company profits, and for low-income earners and retirees, they can actually result in cash refunds from the ATO.

The key takeaway: always include your franking credits on your tax return, hold your shares for at least 45 days around the ex-dividend date (or keep total credits under $5,000), and keep proper records of every dividend received.

Your future self at tax time will thank you.