Franking Credits (Imputation Credits)
Tax credits attached to dividends representing company tax already paid on the profits, preventing double taxation.
Franking credits (also called imputation credits) represent the company tax already paid on the profits from which dividends are distributed. Under Australia's dividend imputation system, shareholders include both the dividend and the attached franking credits in their assessable income (grossed-up dividend), then receive a tax offset equal to the franking credits. This prevents the same profits being taxed twice — once at the company level and again in the shareholder's hands.
For example, a company taxed at 30% earns $100 profit, pays $30 company tax, and distributes $70 as a fully franked dividend with $30 franking credits. The shareholder includes $100 ($70 + $30) in their assessable income and receives a $30 tax offset. If the shareholder's marginal rate is 30%, the $30 offset exactly covers their tax on the $100 — resulting in no additional tax. If their rate is lower (or zero), the excess franking credits are refunded.
For companies taxed at the lower base rate of 25%, dividends carry a maximum franking rate of 25/75 (33.33 cents per dollar of dividend). This lower franking rate affects shareholder tax calculations. The refundable nature of franking credits is particularly valuable for retirees and low-income earners, including SMSFs in pension phase, as they can receive cash refunds of unused franking credits when they lodge their tax return.