Franking Credits Explained: How They Work, With Worked Examples

If you own ASX shares or Australian ETFs, you've probably seen the term "franking credit" on a dividend statement and wondered what it actually means for your tax bill.

Franking credits are one of the more distinctly Australian features of investing — and once you understand how they work, they're not complicated at all. This guide walks through what franking credits are, how to calculate them, and how they play out differently for individuals, SMSFs and ETF investors, with worked examples throughout.

What are franking credits?

A franking credit (also called an imputation credit) is a tax credit attached to a dividend paid by an Australian company. It represents tax the company has already paid on its profits before that profit was handed to you as a shareholder.

Here's the problem franking credits solve: without them, company profit would be taxed twice — once when the company pays tax on it, and again when you're taxed on the dividend you receive. Australia's dividend imputation system prevents this "double taxation" by giving shareholders credit for the tax the company has already paid.

So when you receive a fully franked dividend, you're effectively receiving:

• The cash dividend itself, plus

• A tax credit you can use to offset your own tax bill (or, in some cases, get refunded as cash).

A quick bit of history

Australia introduced dividend imputation in 1987. For over a decade, franking credits could only reduce your tax bill to zero — any leftover credit was lost. That changed in 2000, when the rules were amended so that excess franking credits became fully refundable in cash to Australian resident individuals, super funds and eligible entities. That single change is why franking credits are such a big deal for retirees and SMSFs today — more on that below.

How franking credits are calculated

The formula depends on the company's tax rate. Most large ASX companies pay tax at 30%, while eligible "base rate entities" (generally smaller companies) pay 25%.

• 30% tax rate: Franking credit = Cash dividend × (30 ÷ 70)

• 25% tax rate: Franking credit = Cash dividend × (25 ÷ 75)

Worked example: a fully franked dividend

Let's say you own shares in a company taxed at 30%, and you receive a $700 fully franked dividend.

• Franking credit = $700 × (30 ÷ 70) = $300

• Grossed-up dividend (what you declare as income) = $700 + $300 = $1,000

On your tax return, you include the full $1,000 as assessable income — but you also get to claim the $300 credit against your tax bill. If your effective tax rate on the dividend matches the company's tax rate e.g. (30%), the franking credit fully offsets the tax payable on that income, and the $700 cash you received is effectively tax-free.

Fully franked vs partially franked vs unfranked

• Fully franked (100%): The whole dividend has had company tax paid on it — you get the maximum possible credit.

• Partially franked: Only part of the dividend has company tax attached (common for companies with some offshore earnings, like some ASX-listed miners or healthcare companies).

• Unfranked (0%): No credit attached at all — often because the profit was earned overseas or the company hasn't paid Australian tax on it.

How franking credits affect your tax bill

Whether franking credits reduce your tax to zero or actually generate a refund depends on your marginal tax rate. For a company tax rate of 30%:

This is why franking credits are particularly valuable for lower-income investors, retirees, and superannuation funds in pension phase — they're often paying tax at rates below 30%, so a meaningful chunk of the credit comes back as cash.

In practice, your final tax outcome may also be affected by the Medicare levy and other personal tax circumstances.

Franking credits and SMSFs

Self-managed super funds are taxed differently depending on what phase they're in, which changes how franking credits play out.

• Accumulation phase: The fund's earnings are generally taxed at 15%. Franking credits offset this tax, and any excess is refunded.

• Pension phase: Assets supporting retirement income streams are generally taxed at 0%. Because the fund's tax bill is nil, the entire franking credit is refunded in cash.

Worked example: An SMSF in pension phase receives a $7,000 fully franked dividend. The attached credit is $7,000 × (30 ÷ 70) = $3,000. Because the fund's tax rate on this income is 0%, the fund keeps the $7,000 cash dividend and will generally receive the full $3,000 credit back from the ATO — a combined benefit of $10,000 from a $7,000 dividend.

This is one reason dividend-paying ASX shares and ETFs are so commonly represented in SMSF portfolios, particularly for members in retirement. If you're weighing up how a SMSF trading account might fit your fund's investment strategy, it's worth discussing the details with your accountant or a licensed adviser, since every fund's tax position is different.

Franking credits and ETFs

Exchange-traded funds (ETFs) that invest in Australian shares generally pass franking credits straight through to unit holders, in the same proportion as the dividends they receive from the underlying companies.

• Australian equity ETFs (for example, funds tracking the ASX 200 or ASX 300) typically distribute a meaningful level of franking, because they often hold many profitable, dividend-paying Australian companies.

• International equity ETFs generally distribute little to no franking, because the underlying companies are taxed overseas, not in Australia — there's no Australian company tax to attach a credit to.

If dividend income and franking credits matter to your strategy, it's worth checking an ETF's distribution history and franking percentage before you invest — this is usually available in the fund's product disclosure statement or fact sheet. You can browse some of the more widely-held options in our guide to ETFs Selfwealth investors buy.

The 45-day holding rule

To stop investors from buying shares just before a dividend to grab the franking credit and selling straight after, the ATO applies a "holding period rule": you generally need to hold shares at risk for at least 45 days (not counting the day you buy or sell) to be entitled to claim the franking credit.

There's a helpful exception for everyday investors: if your total franking credit entitlement for the year is $5,000 or less, the 45-day rule doesn't apply to you. This covers most individual retail investors, so it's mainly larger holdings and SMSFs that need to actively track holding periods.

How to keep track of your franking credits

Your dividend statements (and your annual tax/investment statement, if your broker provides one) will show the cash dividend, the franked amount, and the franking credit attached. Some investors choose to reinvest dividends automatically rather than take them as cash — if that interests you, it's worth reading up on dividend reinvestment plans first, since they come with their own considerations.

At tax time, these figures feed directly into your tax return (or your SMSF's return), so accurate record-keeping across the year makes lodging much easier — either yourself or through a registered tax agent.

Common mistakes to avoid

• Assuming all dividends are fully franked. Check the franking percentage on each dividend — some ASX companies with overseas earnings pay partially franked or unfranked dividends.

• Forgetting the 45-day rule if you're trading larger parcels or have significant franking credit entitlements.

• Not keeping dividend statements, making it harder to reconcile figures at tax time.

• Overlooking franking levels when comparing ETFs, especially if dividend income and imputation credits are part of your strategy.

Getting started

Understanding franking credits is one part of building a well-informed approach to dividend investing on the ASX. If you're ready to start investing in dividend-paying Australian shares or ETFs, you can open a Selfwealth account online in around 15 minutes, with flat $9.50 brokerage and no account-keeping fees.

Frequently asked questions

Are franking credits the same as imputation credits? 

Yes — "franking credit" and "imputation credit" refer to the same thing and are used interchangeably in Australia.

Can I get a cash refund for franking credits? 

Yes, if your total franking credits are more than the tax you owe, the excess is refunded to you in cash by the ATO, provided you meet the eligibility rules (including the holding period rule where it applies).

Do all ASX shares pay franked dividends? 

No. Franking depends on how much Australian company tax has been paid on the profit being distributed. Some companies pay fully franked dividends, others partially franked, and some pay no franking at all, particularly if a large share of their profit is earned overseas.

How do franking credits work for SMSFs in the pension phase? 

Because pension-phase assets are generally taxed at 0%, an SMSF in pension phase typically receives the full franking credit back as a cash refund, in addition to the cash dividend. Every fund's situation differs, so it's worth checking with your fund's accountant or adviser.

Do international ETFs pay franking credits? 

Generally no. Franking credits arise from Australian company tax paid, so ETFs holding international shares usually don't attach franking credits to their distributions.

What is the 45-day holding rule? 

It's an ATO rule requiring shares to be held "at risk" for at least 45 days (excluding purchase and sale dates) to claim the franking credit, designed to prevent short-term trading purely to capture credits. A $5,000 franking credit threshold exempts most everyday investors from this rule.