How do franking credits work with dividends in Australia?

Franking credits (also called imputation credits) are a tax system unique to Australia that prevents company profits from being taxed twice — once in the company and again as a dividend in the hands of shareholders.

How it works: An Australian company pays corporate tax at 25% or 30% on its profits. When it pays a dividend from those after-tax profits, it can 'frank' the dividend — attaching a franking credit that represents the tax already paid at the company level. As a shareholder, you must declare both the cash dividend and the franking credit as income (the 'grossed-up' amount), but you then receive the franking credit as an offset against your tax liability.

Example: You receive a A$70 franked dividend with a A$30 franking credit (30% company tax rate, fully franked). Your assessable income includes A$100 (A$70 + A$30). If your marginal tax rate is 32.5%, your tax is A$32.50, but you subtract the A$30 franking credit — net tax payable is just A$2.50. If your marginal rate is 19%, your tax is A$19, and you receive a refund of A$11 (the excess franking credit).

Excess franking credits: If your franking credits exceed your tax liability, the ATO refunds the excess. This makes fully franked dividends particularly valuable for low-income earners, retirees drawing pensions from super, and self-managed super funds in pension phase.

Partially franked dividends: A dividend may be partially franked if the company paid less than the full company tax rate on some profits (e.g. due to tax deductions). The remaining portion is unfranked.