How Franking Credits Work in Australia
Australia's dividend imputation system prevents corporate profits from being taxed twice — once at the company level and again at the shareholder level. When an Australian company pays tax on its profits at the corporate rate (30% or 25%), it attaches franking credits to the dividend it pays shareholders. These credits represent the tax already paid.
When you lodge your tax return, the grossed-up dividend (cash dividend plus franking credits) is included in your taxable income. The franking credits offset your tax liability — and if your marginal rate is lower than the corporate rate, you receive a cash refund from the ATO for the excess.
Who benefits most from franking credits?
Low-income earners and retirees benefit most from franking credits because their marginal tax rate is well below the corporate tax rate. A retiree drawing from an SMSF in pension phase pays zero tax — meaning all franking credits are received as a cash refund. This is why Australian blue-chip shares paying fully franked dividends are particularly prized in SMSF portfolios.
What is a fully franked dividend?
A fully franked dividend means the company has paid the maximum possible corporate tax on the profit being distributed. The franking credit attached equals the tax paid — using the formula: Franking Credit = (Dividend ÷ (1 − Tax Rate)) × Tax Rate. For a $700 dividend from a company paying 30% tax, the franking credit is $300, giving a grossed-up dividend of $1,000.
Can I get a franking credit refund if I don't pay tax?
Yes — this is one of the most powerful features of Australia's imputation system. If your total franking credits exceed your total tax liability for the year, the ATO refunds the excess as cash. This applies to anyone with a low or zero marginal rate: retirees drawing from an SMSF in pension phase pay no tax and receive the full credit as a cash refund. A low-income earner receiving a $700 fully franked dividend grosses up to $1,000 and, if their tax liability is nil, receives the $300 franking credit as a refund.
How do ETF franking credits work?
ETFs holding Australian shares pass through franking credits to unit holders in proportion to their unit holding. The ETF manager pools all franked dividends received from the underlying shares and distributes the credits annually. You receive a tax statement (AMMA statement for managed funds, or an annual tax statement from the ETF provider) showing your share of dividends and their attached franking credits. You declare these in your tax return exactly as you would for directly held shares. The key difference: an ETF may hold partially franked stocks alongside fully franked ones, so the weighted franking percentage varies by fund.
Do I need to do anything to claim franking credits?
No separate form or election is required. When you lodge your tax return through myTax or with an accountant, you enter the dividends and franking credits as shown on your dividend or distribution statements. The ATO's system automatically calculates the offset against your tax liability and any refundable excess. The critical step is keeping all your dividend statements and AMMA tax statements — these are issued by companies and fund managers in July each year and are sometimes available through your broker's tax reports or the ATO pre-fill service.
What is the 45-day rule?
The 45-day holding rule prevents investors from buying shares just to capture a franked dividend and then selling immediately. To claim franking credits, you must hold the shares 'at risk' for at least 45 days (90 days for preference shares) around the ex-dividend date — not counting the purchase and sale days themselves. The rule does not apply if your total franking credit claim for the year is $5,000 or less, which covers most retail investors who receive credits incidentally through ordinary long-term holdings. If you're a frequent trader or run dividend-stripping strategies, the rule requires careful management.
Are franking credits worth more in an SMSF?
Yes, significantly. An SMSF in accumulation phase pays 15% tax on investment income — and franking credits attached to Australian shares directly offset that 15% liability. For a fully franked dividend grossed up to $1,000 (with $300 in franking credits), the SMSF pays 15% tax ($150) and applies the $300 credit — receiving a $150 net refund. An SMSF in pension phase pays zero tax and receives the full $300 as a cash refund. This structural advantage is why Australian equity exposure via directly held shares or LICs is particularly popular in SMSFs, compared to international equities which carry no franking credits.
Can I claim franking credits on shares held in a margin loan?
Yes, provided you are the beneficial owner of the shares and meet the 45-day holding rule. Shares held through a margin loan or other leveraged facility qualify for franking credits in the same way as shares held outright. The interest on the margin loan is separately deductible against your investment income. However, if the shares are lent out through a securities lending program (common with some brokers and custodians), the payments you receive may be 'manufactured dividends' rather than genuine dividends — and manufactured dividends do not carry franking credits. Check your broker's terms.