Franking credits — the Australian tax advantage most investors overlook

Why franking credits exist

Without dividend imputation, company profits would be taxed twice: once at the corporate level (currently 30% for large companies) and again in the hands of shareholders at their marginal tax rate. Australia's system, introduced in 1987, attaches a tax credit to dividends representing the company tax already paid, so the shareholder only pays the difference between the company rate and their personal rate.

If your marginal tax rate is lower than the corporate rate, you can receive a refund for the excess credits. This makes Australian shares particularly attractive for low-income investors, retirees, and superannuation funds in pension phase — all of whom can receive those refunds in cash.

How a franked dividend works, in numbers

Say a company earns $100 in profit. It pays $30 in company tax, leaving $70 to distribute as a dividend. If it distributes the full $70 as a fully franked dividend, it attaches $30 in franking credits — representing the tax it already paid.

For someone on a 19% marginal rate, the franking credits would exceed the tax owed — generating a $10.90 refund from the ATO. For a super fund in accumulation phase (15% tax), the refund would be $15. For pension phase (0% tax), the entire $30 credit is refunded.

Partial franking

Not all dividends are fully franked. A company that earns some income overseas may not have paid Australian company tax on all of it, so it can only attach credits proportional to the Australian tax paid. This is expressed as a franking percentage — a 70% franked dividend has credits attached for 70% of the grossed-up amount. Some dividends are completely unfranked.

How ETFs pass franking credits through

When an ETF holds Australian shares that pay franked dividends, the fund accumulates those franking credits throughout the period. When the ETF makes a distribution to unitholders, it passes the franking credits through proportionally. Your tax statement from the ETF provider will show the cash distribution amount and the attached franking credits separately.

You include both in your tax return: the grossed-up amount as income, and the franking credits as an offset against your tax liability. The mechanics are the same as receiving a franked dividend directly from a company — the ETF is just the intermediary.

The 45-day rule

There's one catch worth knowing. To be eligible for franking credits on a dividend, you generally need to hold the shares at risk for at least 45 days around the ex-dividend date (90 days for preference shares). For most long-term ETF investors this is irrelevant — you're not buying and selling around distribution dates. But it's worth knowing the rule exists if you're ever tempted to time your purchases specifically to capture distributions.

Franking credits in super

Superannuation funds are among the biggest beneficiaries of Australia's imputation system. A super fund in accumulation phase pays 15% tax on investment income. Since most large ASX companies pay tax at 30%, the franking credits attached to Australian share dividends almost always exceed the fund's tax liability on that income — generating refundable excess credits. In pension phase, the entire franking credit is refunded.

This is one structural reason why Australian shares ETFs are particularly well-suited to superannuation portfolios, including SMSFs.

The broader picture

Franking credits don't increase the total return of Australian shares — the company has already paid the tax and it's embedded in the credit. What they do is prevent that tax from being paid twice. For lower-tax investors and entities, the credits effectively top up the after-tax return compared to what an investor on a higher rate would receive. It's a redistribution of tax efficiency across investors, not additional wealth creation from nowhere.