What is Franking Credit: A Simple Guide for Beginners
- Leonie Martin
- Dec 8, 2025
- 6 min read
Investing in shares and receiving dividends can be rewarding, but it comes with its own set of terms that can be confusing for beginners. One term you may hear often is franking credit. Many investors ask questions like, “what is a franking credit?”, “how do franking credits work?”, or “what is franked income?” This guide aims to explain everything you need to know about franking credits in Australia in simple, easy-to-understand language.
What is Franking?
Before we dive into franking credits, it’s helpful to understand what is franking. In the Australian tax system, companies pay tax on their profits at the corporate tax rate. When these companies distribute profits to shareholders as dividends, they sometimes include a franking credit, which represents the tax the company has already paid on that income.
Put simply, franking is a way of preventing double taxation. Without franking, shareholders could end up paying tax again on income the company has already taxed. By attaching franking credits to dividends, the Australian Taxation Office (ATO) allows investors to offset the tax already paid by the company against their personal tax liability.
What Are Franking Credits?
Franking credits are tax credits attached to dividends that a company pays to its shareholders. They reflect the amount of tax the company has already paid on its profits. These credits are also sometimes called imputation credits.
For example, if a company pays a dividend of $70 to a shareholder and has already paid $30 in tax on that amount, the total value of the dividend to the shareholder is $100. The $30 is the franking credit, and the shareholder may use it to reduce their own tax liability.
When people ask, “what is a franking credit?”, the answer is: it’s a credit for the tax a company has already paid, which you can claim on your personal tax return.
What is Franked Income?
Franked income refers to dividends that come with franking credits attached. If you receive a franked dividend, it means the company has already paid tax on that income at the corporate tax rate. This is different from unfranked dividends, where the company has not paid tax and the shareholder is responsible for paying the full tax on the dividend.
Understanding what does franked mean is simple: it indicates that the dividend is attached with a franking credit and represents income that has been taxed at the corporate level.
Investors often look for franked dividends because they can reduce their personal tax liability and even result in refunds if their personal tax rate is lower than the corporate tax rate.
How Do Franking Credits Work?
To understand how do franking credits work, let’s look at a practical example:
Suppose a company distributes a dividend of $70 to you. The company has already paid $30 in tax on this profit. The $30 is the franking credit attached to your dividend. For tax purposes, you need to declare the grossed-up dividend, which is the $70 dividend plus the $30 franking credit, making it $100.
Depending on your personal tax rate, this franking credit may:
Reduce the amount of tax you need to pay.
Cover all your tax liability on that income if your personal rate is lower than the corporate rate.
Even result in a refund from the ATO if the franking credit exceeds your tax liability.
Here’s the step-by-step process of how franking credits work:
The company pays tax on its profits.
The company distributes dividends to shareholders.
If the dividend is franked, it comes with a franking credit representing the tax already paid.
Shareholders include both the cash dividend and the franking credit in their tax return.
The franking credit reduces the tax payable, or may even result in a refund.
This is why franking credits explained is often described as a way to prevent double taxation of company profits.
Franking Credit Meaning
The franking credit meaning is essentially a “tax already paid” credit. It’s a benefit to shareholders because it reduces the tax they have to pay on dividend income.
Example: If you earn $70 in franked dividends with a $30 franking credit, you report $100 as income. If your personal tax is lower than the company tax, the ATO may refund you the difference.
Understanding what is a franking credit is important for any investor who wants to optimise their investment returns and tax obligations.
Get Franked: What Does It Mean?
When investors talk about wanting to get franked, they usually mean they prefer dividends that come with franking credits. Fully franked dividends are especially attractive because they provide the opportunity for tax offsets, which can be financially beneficial.
For example, retirees and low-income investors may receive franked dividends that result in little to no tax payable and sometimes even a cash refund from the ATO. This is why many Australian investors seek out fully franked dividends when building their investment portfolios.
Types of Dividends
Dividends can come in several forms, depending on whether they are franked or not:
Fully Franked Dividends – These dividends have a franking credit that equals the company tax already paid. They are most advantageous for shareholders.
Partially Franked Dividends – Only a portion of the dividend has a franking credit. You still receive some benefit but not as much as a fully franked dividend.
Unfranked Dividends – No franking credit is attached. You pay tax on the full amount of the dividend as part of your personal income.
Benefits of Franking Credits
There are several advantages of franking credits explained for investors:
Avoid Double Taxation: Franking credits ensure that profits are not taxed twice, once at the corporate level and again at the personal level.
Tax Refunds: If your personal tax rate is lower than the corporate tax rate, you may receive a refund of the excess franking credit.
Encourages Investment: Fully franked dividends can make Australian shares attractive for investors looking for reliable, tax-efficient income.
Predictable Returns: Investors can plan for the tax benefits and potential refunds, improving cash flow planning.
How to Claim Franking Credits
Claiming franking credits is relatively straightforward:
Ensure you have franked dividend statements from your company or broker.
Include both the cash dividend and franking credit in your tax return.
The ATO calculates your final tax liability, taking franking credits into account.
If the franking credit exceeds your tax liability, the ATO may refund the difference to you.
It’s important to keep accurate records of all dividends and franking credits, especially if you receive multiple dividends from different companies during the financial year.
Who Benefits Most from Franking Credits?
While all investors can benefit from franking credits, some groups gain more:
Low-Income Earners: They can receive refunds if franking credits exceed their tax liability.
Retirees: Many retirees rely on dividend income for living expenses, and franking credits can enhance their cash flow.
Long-Term Investors: Those holding shares for income can use franking credits to improve overall investment returns.
Understanding what franked income is particularly relevant for these groups because it directly affects how much tax they pay and the net income they receive.
Franking Credits and Share Market Investment
Investors who understand how do franking credits work can use them to make better investment decisions. For example:
Look for companies that consistently pay fully franked dividends.
Include franking credits in calculations when comparing dividend yields.
Consider your personal tax rate to maximise the benefit of franking credits.
This is why learning what "franked" means and what "getting franked" means is important when building a dividend-focused portfolio.
Conclusion
Understanding what a franking credit, how do franking credits work, and what franked income is essential for any investor in Australia. Franking credits not only prevent double taxation but also provide opportunities for tax refunds and improved cash flow.
Whether you are a beginner investor or someone looking to optimise your dividend portfolio, knowing what "franked" means and how to get franked can help you make smarter investment decisions. Fully franked dividends are especially attractive for retirees, low-income earners, and long-term investors because they provide predictable, tax-efficient income.
By learning how franking credits are explained, you can better plan your investments, maximise returns, and understand the tax benefits associated with Australian dividends.
Common Questions About Franking Credits
What is a Franking Credit?
A franking credit is a tax credit attached to a dividend, representing the tax already paid by the company.
What is Franked Income?
Franked income is the dividend income that comes with franking credits.
What Does "Franked" Mean?
A dividend is franked when it comes with franking credits, indicating the company has already paid tax on that profit.
How Do Franking Credits Work?
Franking credits reduce your personal tax liability by offsetting tax already paid at the company level. If the credit exceeds your tax, you may get a refund.
How Do I Get Franked?
Invest in companies that pay fully franked dividends. You’ll receive dividends with attached franking credits.
What is Franking?
Franking is the process of attaching a credit for company tax paid to a dividend to avoid double taxation.
Franking Credit Meaning
It is a credit representing tax the company has already paid, which can be used to offset your personal tax.
