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.
How it works
Franking credits represent company tax already paid on the profits behind a dividend. Under Australia's dividend imputation system, you include both the cash dividend and its attached franking credit in your assessable income — the grossed-up amount — and then receive a tax offset equal to that credit. Because the company has already paid tax on that profit, this offset prevents the same dollar of profit being taxed a second time once it reaches you as a shareholder.
In practice, your dividend statement shows the cash amount and the attached franking credit, which your tax return or tax agent uses to calculate the grossed-up income and the offset. If your own tax on that grossed-up amount is less than the franking credit — common for retirees, low-income earners, and self-managed super funds in pension phase — the excess credit is refunded to you in cash when you lodge your return.
Companies taxed at the lower base rate of 25% can only attach a maximum franking rate of 25/75 (33.33 cents per dollar of dividend), less generous than the 30%-taxed company's rate, so two companies paying the same cash dividend can carry different total franking value. Franking credits only reflect Australian company tax — dividends from foreign companies carry none — which is one reason Australian shares are often favoured by local investors seeking imputation benefits.
Example: grossing up a fully franked dividend
A company taxed at 30% earns $200 of pre-tax profit, pays $60 in company tax, and distributes the remaining $140 as a fully franked cash dividend with $60 in attached franking credits.
The shareholder includes $140 + $60 = $200 in their assessable income and receives a $60 tax offset. If their own tax on that $200 is exactly $60, the offset covers it in full; if it's less than $60, they receive the difference back as a refund.
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Fully Franked Dividend
A dividend where the company has paid the full company tax rate on the underlying profits, with maximum franking credits attached.
Unfranked Dividend
A dividend paid from profits on which no Australian company tax has been paid, so no franking credits are attached.
Partially Franked Dividend
A dividend where only part of the underlying profits have been taxed in Australia, so only partial franking credits are attached.
Company Tax Rate
The flat rate of tax applied to company profits — 25% for base rate entities (turnover under $50 million) and 30% for others.
Tax Offset (Rebate)
A direct reduction in the amount of tax you owe, different from a deduction which reduces taxable income.