What Is Franked Dividend in Australia? Explained
- Sep 10
- 10 min read
A franked dividend is essentially a payment you receive from a company that has already paid tax on its profits. Think of it like getting a gift with a ‘tax paid’ sticker already on it – this clever system stops the same money from being taxed twice.
Decoding Franked Dividends in Australia
When you invest in Australian companies, you'll likely receive payments called dividends, which are simply your slice of the company's profits. But not all dividends are created equal. The idea of a "franked dividend" is a unique and brilliant feature of Australia's tax system, specifically designed to prevent double taxation.
Here’s how it works: before a company pays you a dividend, it first pays corporate tax on its profits to the Australian Taxation Office (ATO). A franked dividend then comes with an attached credit, known as a franking credit (or imputation credit), which represents the tax the company has already paid for you.
This little credit is the secret to unlocking some serious tax benefits. If you're just starting to earn income from shares, it's a great idea to learn more about dividend investing to get a handle on the basics.
Fully Franked vs Partially Franked Dividends
Getting your head around the different dividend types is key to managing your investment returns. The terms might sound a bit jargony, but they just describe how much tax the company has already sorted out.
You'll generally come across three kinds of dividends:
Fully Franked: This is the one you want to see. It means the company paid the full corporate tax rate (which can be up to 30%) on the profit before sending it your way. You get the dividend payment plus a franking credit for that full tax amount.
Partially Franked: This happens when a company has only paid some Australian tax on its profits. You still get a franking credit, but it won't be for the full corporate tax rate.
Unfranked: An unfranked dividend has no franking credit attached at all. This is common when a company has no Australian tax to pay, maybe because of tax losses or because its profits were made overseas.
To make this crystal clear, here’s a quick summary table.
Understanding Dividend Types
Dividend Type | Company Tax Paid | Franking Credit Attached |
|---|---|---|
Fully Franked | Paid at the full corporate rate (up to 30%) | Yes, for the full amount |
Partially Franked | Paid at a partial rate | Yes, but for a partial amount |
Unfranked | No Australian tax paid | No credit attached |
The type of dividend you get directly changes what you owe at tax time. For a deeper dive, our detailed guide explains exactly what are franking credits and how they work.
Why Does Australia Have a Dividend Imputation System?
If franking credits feel like a uniquely Australian perk, that's because they are. The whole setup, known as the dividend imputation system, was a game-changing reform introduced back in 1987 to fix a fundamental unfairness in how investment returns were taxed.
Before this system, company profits went on a painful tax journey. First, the company paid tax on its earnings. Then, when it shared the remaining profits with its shareholders as dividends, those same shareholders had to pay income tax on that money all over again. It was a classic case of double taxation.
This double-dipping was widely seen as unfair, and it actively discouraged Australians from investing in local companies. The imputation system was created to level the playing field, making sure that company profits are only taxed once—at the shareholder's personal tax rate.
Solving the Double Taxation Puzzle
The solution was brilliantly simple. Instead of taxing the money twice, the system "imputes" (or passes on) the credit for the tax already paid by the company directly to you, the shareholder. That credit is the franking credit. Think of it as a pre-paid tax voucher that proves the company has already settled its tax bill on that profit.
Introduced by the Hawke-Keating Labor government, this system completely reshaped the investment landscape. When an Aussie company pays out dividends, it can attach a franking credit showing the corporate tax it has already paid, which is usually 30%. As a shareholder, you then declare both the dividend amount and the franking credit on your tax return, using that credit to lower your own tax bill.
This structure makes Australian shares especially attractive for local investors because the final tax you pay is tailored to your own financial situation.
How It Connects to Your Personal Tax Rate
The real magic of a franked dividend hinges on your marginal tax rate. If your personal tax rate is lower than the 30% corporate rate the company paid, you don't just reduce your tax—you can actually get the difference back as a cash refund from the ATO.
On the other hand, if your personal tax rate is higher than the company's, the franking credit simply reduces the extra tax you owe. It’s a win-win.
To really make this work for you, it's crucial to know how franking credits interact with your income bracket. You can get a clear picture by looking over the latest Australian tax rates for 2025. This knowledge is what turns franking credits from an abstract concept into a real, tangible financial benefit in your pocket.
How to Calculate Your Franking Credits
Alright, let's move from theory to actual numbers. Figuring out the value of a franking credit attached to your dividend is simpler than it sounds. It’s really just about revealing the amount of tax the company has already paid on your behalf.
First up, you need to find the "grossed-up" dividend amount. Think of this as the total pre-tax value of your dividend—it’s the cash you receive plus the franking credit. This grossed-up figure is what the Australian Taxation Office (ATO) considers part of your taxable income for the year.
The Franking Credit Formula
The calculation itself is pretty straightforward. All you need is the dividend amount you received and the corporate tax rate the company paid, which is usually 30%.
Let’s walk through an example. Imagine a company pays you a fully franked dividend of $70. With the corporate tax rate at 30%, the franking credit is calculated like this: $70 / (1 - 0.30) - $70, which works out to be $30.
So, your total grossed-up dividend income becomes $100 (your $70 in cash + the $30 credit). You'll declare and pay tax on the full $100, but you get to use that $30 credit to reduce your final tax bill. For investors on a lower marginal tax rate, this can even lead to a cash refund, a scenario explored in research on high-dividend yield strategies.
See How Franking Credits Impact Your Tax Return
This is where the real magic of a franked dividend happens: on your tax return. The actual benefit you get is tied directly to your personal marginal tax rate. It means the very same dividend can lead to completely different outcomes for different investors. Think of it less like a one-size-fits-all bonus and more like a tailored tax adjustment just for you.
Let’s stick with our earlier example: you received a $70 fully franked dividend which came with a $30 franking credit. When you do your tax, you must declare the full $100 (the "grossed-up" amount) as income to the ATO. What happens next all depends on which tax bracket you fall into.
For some investors, that $30 credit will be more than enough to cover the tax they owe on the dividend, leading to a cash refund from the tax man. For others, it might just reduce their total tax bill. Getting your head around this is the key to understanding the true value hiding in your share portfolio.
Comparing Investor Scenarios
To really see this in action, let’s imagine three different investors who all receive the exact same $100 grossed-up dividend. The only thing that separates them is their marginal tax rate for the financial year.
This table breaks down how the imputation system works to create a fair result based on each person's situation. It's a critical part of knowing how to file taxes correctly to make sure you're not leaving any money on the table.
The core principle is simple: If your personal tax rate is lower than the 30% corporate tax rate already paid on the profit, the ATO refunds you the difference. If your rate is higher, you just pay the gap.
Franking Credits and Your Marginal Tax Rate
Here’s a snapshot of how your personal tax rate changes the outcome of receiving a $70 fully franked dividend with a $30 franking credit attached.
Investor Scenario | Marginal Tax Rate | Tax on Grossed-Up Dividend ($100) | Franking Credit Applied | Final Outcome (Tax Payable / Refund) |
|---|---|---|---|---|
Low-Income Earner | 19% | $19 | $30 | $11 Refund |
Middle-Income Earner | 30% | $30 | $30 | $0 Tax Payable |
High-Income Earner | 45% | $45 | $30 | $15 Tax Payable |
As you can see, the system works exactly as intended. The low-income investor gets a nice little cash refund, the middle-income earner pays nothing extra, and the high-income investor still gets a handy discount on their tax bill. Everyone benefits, but in a way that’s fair for their circumstances.
The Broader Impact of Dividend Imputation
Franked dividends do more than just tweak your tax return—they fundamentally shape the entire Australian corporate landscape. The imputation system gives local companies a powerful incentive to hand profits back to shareholders as dividends, rather than holding onto them.
This makes Australian shares especially attractive to investors chasing a reliable income stream, like retirees who can make great use of the tax-effective payments.
Of course, this corporate behaviour is a bit of a double-edged sword. On one hand, it enforces a culture of discipline around capital management, ensuring shareholders see a tangible return on their investment. On the other hand, a relentless focus on dividend payouts can starve a company of the cash it needs for reinvestment, future growth, and innovation.
A Balancing Act for Australian Companies
This dynamic has created a corporate culture where shareholder returns through dividends are a top priority. You can see this trend reflected in data from the Reserve Bank of Australia, which shows a significant rise in dividend payments over recent years—a pattern that’s hard to separate from the appeal of franking credits.
Ultimately, Australian companies have to perform a delicate balancing act. They need to keep their income-focused investors happy with consistent franked dividends, but they also have to stash away enough capital to stay competitive and ensure they’re still around for the long haul.
Getting your head around these wider economic forces is a crucial part of any investor’s guide to the investment decision making process, because it gives you the ‘why’ behind the way Australian companies operate.
Right, so you understand the theory. Now, how do you actually get that franking credit goodness onto your tax return?
This is where the rubber meets the road, and thankfully, it’s a pretty straightforward process. It all comes down to paying close attention to your dividend statements and knowing a couple of key rules from the Australian Taxation Office (ATO).
Each time you're paid a dividend, the company will send you a dividend or distribution statement. Hang onto this! It’s the key document that spells out everything you need: the cash you received and, crucially, the amount of the franking credit attached. On your tax return, you’ll need to declare the total grossed-up dividend—that’s the cash dividend plus the franking credit—as part of your assessable income. The franking credit amount is then claimed as a tax offset, which is what directly chips away at your final tax bill.
And if you realise you've missed this on a past return? Don't stress. It's usually fixable. We cover the steps in our guide on how to amend a tax return in Australia.
Key Eligibility Rules to Remember
Before you can claim that credit, the ATO has a few conditions you need to meet. The big one is the 45-day holding rule.
This rule exists to stop people from gaming the system—like buying shares the day before a dividend is paid just to grab the franking credit, then immediately selling them.
To be eligible, you must have held the shares "at risk" for a continuous period of at least 45 days. This timeframe doesn't include the day you bought them or the day you sold them.
For instance, if you purchase shares on a Monday, day one of your holding period is actually Tuesday. It’s a simple but important detail that ensures the benefit goes to genuine investors.
There is, however, an exception for smaller investors. If the total of all your franking credits for the financial year comes to less than $5,000, you are generally exempt from this 45-day rule. Still, it’s always smart to double-check that this exemption applies to your specific situation. Getting this right means you’re making your investments work as hard for you as possible.
Your Top Questions About Franked Dividends, Answered
Once you get the hang of franked dividends, a few more specific questions usually pop up. Let's tackle some of the most common ones investors ask, so you can feel confident about how the imputation system works for you.
Clearing Up Common Confusion
Are franking credits just another tax deduction? Not quite, and the difference is a big deal. A tax deduction simply reduces your total taxable income. A franking credit, on the other hand, is a tax offset, which means it directly cuts down the final tax bill you have to pay. Better yet, if your franking credits add up to more than your tax liability, the ATO gives you the difference back as a cash refund.
Do I get franking credits from my international shares? Unfortunately, no. Franking credits are a unique feature of the Australian tax system. You can only get them from eligible Aussie companies that have paid their corporate tax right here in Australia.
Understanding the Fine Print
What’s this 45-day holding rule I keep hearing about? This is a key rule to remember. To be eligible to claim your franking credits, you must hold your shares ‘at risk’ for at least 45 consecutive days (and this doesn't include the day you buy or sell). The rule is there to stop people from gaming the system—buying shares right before a dividend is paid and then selling them straight after just to pocket the credit. It ensures the benefit goes to genuine, longer-term investors. Understanding these kinds of rules is crucial for any investor, no matter your profession. It’s just as important as knowing the specifics for your own industry, like those we cover in our tax guide for hairdressers and beauty professionals.
Need a Hand with Your Investments and Tax?
Let's be honest, navigating Australian tax law can feel like a maze, especially when you throw investment income like franked dividends into the mix. Making sure you claim every credit you're entitled to and getting the best possible return takes a sharp eye for detail. The good news is, you don’t have to go it alone.
Our team of tax experts is here to cut through the confusion. We can help you make the most of your investments while ensuring everything is perfectly compliant with the ATO.
A solid financial plan goes beyond just dividends. It's crucial to understand the tax implications of various investment strategies to see the bigger picture. Whether you've been investing for years or are just getting started, the right advice can make a huge difference to your bottom line.
If you have questions about your specific situation, our team is ready to help.
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