Franking credits explained: how the Australian imputation system works
Australian companies pay 30% corporate tax before distributing dividends. The imputation system passes that tax to shareholders as a credit — and if your personal rate is lower, the ATO pays you the difference.
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How the imputation system works
Australia uses a dividend imputation system, which prevents company profits from being taxed twice. Without imputation, a company earns $100, pays $30 in tax (30% corporate rate), distributes the remaining $70 as a dividend, and the shareholder pays personal income tax on that $70 again — double taxation.
With imputation, the company still pays $30 in tax and distributes $70. But it also attaches a $30 franking credit to the dividend. The shareholder:
- Receives $70 cash dividend plus a $30 franking credit
- Includes the full grossed-up $100 as taxable income
- Calculates tax at their marginal rate on $100
- Subtracts the $30 franking credit from that tax bill
If the tax bill before the credit is less than $30, the ATO pays the difference as a cash refund.
Worked example at four marginal rates
| Marginal rate | Tax on grossed-up $1,000 | Less franking credit | Net tax / refund |
|---|---|---|---|
| 0% (no income) | $0 | $300 | +$300 refund |
| 16% | $160 | $300 | +$140 refund |
| 30% | $300 | $300 | $0 (break even) |
| 32.5% | $325 | $300 | $25 extra tax |
| 37% | $370 | $300 | $70 extra tax |
| 45% | $450 | $300 | $150 extra tax |
Based on a $700 fully franked dividend = $1,000 grossed-up income with $300 franking credit. Medicare levy not included. Source: ATO imputation rules.
Net outcome by marginal rate
Net refund (+) / extra tax (−) per $700 fully franked dividend
Green = ATO cash refund. Amber = extra tax after franking offset. Per $700 fully franked dividend ($300 franking credit).
Who benefits most
The franking credit advantage is greatest for investors whose marginal tax rate is below 30%. This includes:
- Retirees — often have low taxable income, generating large franking refunds
- SMSF members in pension phase — zero tax rate means the full $300 credit is refunded
- Low-income earners — in the 0% or 16% bracket, franking credits are worth more than their dividend yield implies
- Early FIRE retirees — in retirement with low other income, fully franked dividends from VAS or A200 become highly tax-efficient
High-income earners (37–45% marginal rate) still benefit from franking credits — they reduce the effective tax rate on dividend income — but don't receive refunds.
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Frequently asked questions
What is a franking credit?
A franking credit (also called an imputation credit) represents the Australian company tax (30%) already paid on the profit before a dividend was distributed. When you receive a franked dividend, you also receive a tax credit for the tax already paid. This credit offsets your personal tax liability. If your personal tax rate is lower than 30%, you receive the difference as a cash refund.
How do I calculate my franking credit benefit?
If you receive a $700 dividend that is fully franked, the grossed-up dividend is $1,000 ($700 ÷ 0.70). The franking credit is $300. You include the grossed-up $1,000 as income, then subtract the $300 franking credit from your tax bill. At a 32.5% marginal rate, you owe $325 in tax — but subtract $300, so you pay only $25 extra. At a 16% rate, you owe $160 — subtract $300, and receive a $140 refund.
Can I get a cash refund on franking credits?
Yes — if your franking credits exceed your total tax liability, the ATO pays you the excess as a cash refund. This happens when your marginal tax rate is below 30%. Retirees with low incomes, people with significant tax deductions, and those in a self-managed super fund (SMSF) often receive large franking credit refunds. This makes fully franked Australian shares especially valuable for low-income investors.
Which ETFs have the most franking credits?
Australian share ETFs — VAS, A200, IOZ, and similar — carry the most franking credits because they hold large Australian companies (banks, miners, supermarkets) that pay fully franked dividends. VAS and A200 typically pass through significant franking. International ETFs (VGS, NDQ) carry no Australian franking credits. Diversified 'all-in-one' ETFs like DHHF and VDHF carry some franking from their Australian component (typically 30–40% of the fund).
Are franking credits affected by the 2026 Budget?
No. The franking credit system was not changed in the May 2026 Federal Budget. The government's CGT changes (effective 1 July 2027) affect capital gains tax but leave dividend imputation intact. Franking credits remain one of the most tax-effective features of the Australian investing system.
Does the 45-day rule apply to me?
The 45-day rule requires you to hold shares for at least 45 days (90 days for preference shares) around the ex-dividend date to claim franking credits. The rule prevents investors from briefly buying shares just to claim a credit and immediately selling. For long-term investors who hold ETFs continuously, this rule is irrelevant — you always satisfy the holding period requirement.