What is Franking Credit: A Simple Guide for Beginners
- Leonie Martin
- Apr 30
- 5 min read
Updated: 5 days ago
If you’re new to investing, you might have heard the term franking credits and wondered what it means. Franking credits are a way to make sure you don’t pay tax twice on the money companies earn and share with you through dividends. In Australia, when a company makes a profit, it pays tax on that money. When the company then gives some of that profit to shareholders as dividends, the shareholders can use franking credits to reduce their own tax bill, or even get a tax refund.
Franking credits are especially important for investors because they help boost the overall value of your dividends. Understanding how they work can make a real difference to your tax return and your income from investments. In this simple guide, we’ll explain exactly what franking credits are, how they benefit you, and how you can make the most of them.
What Are Franking Credits?
When you invest in a company, you become a shareholder and are entitled to receive a share of its profits — this is called a dividend. In Australia, companies usually pay tax on their profits before handing out dividends. To make sure you don’t get taxed again on the same money, the company gives you something called franking credits.
Franking credits, sometimes known as imputation credits, show that tax has already been paid on the income you are receiving. You can use these credits to reduce your own tax bill when you lodge your tax return. In some cases, if the company's tax rate is higher than yours, you might even get a refund.
This system is called ‘imputation’, designed to stop double taxation and help shareholders get the full benefit of their investment earnings. Understanding how franking credits work is a smart step toward making the most out of your dividends and managing your taxes better.
What is the purpose of franked income?
The main purpose of franked income is to avoid double taxation on company profits. When companies earn profits, they are required to pay corporate tax on that income. If they then distribute some of these profits to shareholders as dividends, franking credits are attached to show that tax has already been paid. This system allows shareholders to claim a credit for the company tax already paid, which can either reduce the amount of personal income tax they owe or even result in a tax refund if their individual tax rate is lower than the company's.
Franked income ensures that profits are only taxed once, making the tax system fairer for investors. It encourages more people to invest in Australian companies by making dividends more attractive. For shareholders, receiving franked dividends means they get more value from their investments, while companies benefit by being able to return profits to shareholders in a tax-effective way.
How to Claim Franking Credits
Claiming franking credits is a straightforward process and is done when you file your tax return. The amount of franking credits you’re entitled to is included in your dividend statement, which you receive from the company paying you the dividend. This statement will show the dividend income you’ve received, as well as any franking credits attached to it.
When you file your tax return, you need to include both the dividend amount and the franking credits. The Australian Taxation Office (ATO will then calculate how much of these credits can be used to offset your tax liability. If the franking credits exceed the tax you owe, you may be eligible for a refund of the difference.
It’s important to make sure that the franking credits are correctly reported in your tax return to ensure you get the full benefit. Always check the dividend statement to ensure the information matches what you need to claim.
How are dividends taxed?
Dividends are taxed as part of your income in Australia. When you receive a dividend, you must include both the dividend amount and any franking credits attached in your tax return. The franking credit represents the tax already paid by the company on that profit.
You are taxed at your personal income, but you can use the franking credit to reduce how much tax you owe. If the credit is more than your tax payable, you may get a refund.
Fully franked dividends give you the most benefit because they come with a full tax credit. Unfranked dividends, on the other hand, have no credits attached, and you must pay the full tax yourself. This system ensures profits are only taxed once between the company and the shareholder.
What’s the Difference Between Franked and Unfranked Dividends?
Dividends can be fully franked, partly franked, or unfranked.
Fully franked dividends mean the company has already paid the full amount of tax on the profit before passing it to shareholders. You receive franking credits with your dividend, which you can use to reduce your personal tax bill. If the franking credits are more than the tax you owe, you may even get a refund from the ATO.
Partly franked dividends mean only part of the tax has been paid by the company. You will still need to pay tax on the portion of the dividend that was not taxed.
Unfranked dividends have had no tax paid by the company. You will need to declare the full amount of the dividend on your tax return and pay tax on it at your personal income tax rate.
Once you lodge your tax return, if your franking credits are more than the tax you owe (including the Medicare levy), the extra amount will be refunded to you by the ATO.
How do the calculations for franked dividends work?
Here is a simple example to demonstrate:
Let’s say Sarah is a shareholder in an Australian company, and she receives a fully franked dividend of $100. The company pays tax at the corporate tax rate of 30%.
To calculate Sarah’s franking credit, we use the formula:
Franking credit = Dividend / (1 - Tax rate) - Dividend
In this case:
$100 / (1 - 0.30) = $142.86
So, Sarah’s franking credit would be $42.86.
The total amount Sarah receives (dividend + franking credit) is $142.86. If the dividend were only 50% franked, Sarah would receive a franking credit of $21.43 instead.
Understanding these credits is important because they can reduce tax liability. If Sarah's tax rate is lower than the company's, she might even be eligible for a refund of the extra franking credit.
Maximising Your Tax Savings with Franking Credits
Franking credits are a valuable benefit for investors, especially those just starting out. When a company pays tax on its profits, it can pass on a portion of that tax to shareholders as franking credits, which reduces the tax you need to pay on dividends. This helps you avoid being taxed twice on the same income.
To take advantage of franking credits, simply include them in your tax return along with your dividend income. If the credits are more than what you owe in tax, the ATO may even issue you a refund.
Not all dividends come with franking credits, so it's important to know when they apply. You’ll also need to meet the holding period rule, which means owning the shares for at least 45 days.
If you need guidance on how to claim franking credits and make the most of your dividends, HelloLedger is here to help. Let us assist you in maximising your tax benefits!
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