If you own Australian shares, you have probably seen "fully franked" next to your dividends and "franking credits" on your tax statement. They exist to stop the same profit being taxed twice — once in the company and again in your hands. Here is how the system works.
The problem franking credits solve
An Australian company pays company tax (30%, or 25% for smaller companies) on its profits. It then pays some of those after-tax profits to shareholders as dividends. Without franking, you would pay tax again on that dividend at your own marginal rate — double taxation on the same profit.
Dividend imputation fixes this by giving you a credit for the tax the company already paid. That credit is the franking credit.
How it works: gross up, then offset
- You receive a franked dividend.
- You gross it up by adding the franking credit — this is the pre-tax profit the dividend came from.
- You pay tax on the grossed-up amount at your marginal rate.
- You subtract the franking credit from your tax bill, because that tax was already paid by the company.
If your marginal rate is higher than the company rate, you top up the difference. If it is lower (or zero), the excess credit reduces your other tax — and can be refunded to you.
A worked example
You receive a $700 fully franked dividend:
- The franking credit attached is $300 (the 30% company tax already paid).
- Grossed-up dividend: $700 + $300 = $1,000.
- You declare $1,000 as income and pay tax at your marginal rate, then subtract the $300 credit.
The outcome by marginal rate:
- 45% taxpayer: tax on $1,000 is $450, minus the $300 credit = $150 to pay.
- 30% taxpayer: tax is $300, minus $300 = nothing to pay.
- 0% taxpayer (e.g. some retirees): tax is $0, minus $300 = $300 refunded.
The Franking Credits Calculator does this for your dividends, and the Dividends Calculator covers the wider picture.
Why franking credits matter for investors
- They make fully franked Australian shares more tax-effective than the headline dividend suggests.
- They are especially valuable to low-rate and zero-rate investors (retirees in pension phase, low earners), who can receive the credit as a refund.
- Not all dividends are fully franked — a dividend can be partly franked or unfranked, in which case less or no credit is attached. Check your dividend statement.
Work out your overall tax position alongside your salary with the Salary Tax Calculator.