How franking credits work
When an Australian company pays tax at 30% and then pays you a dividend out of those profits, the tax it already paid comes attached to the dividend as a franking credit. A $700 fully franked dividend carries a $300 credit. At tax time you declare the grossed-up $1,000 as income, get taxed at your marginal rate, and the $300 credit counts as tax already paid. The point of the system is that company profits get taxed once, at your personal rate, not twice.
The maths
For a fully franked dividend at the 30% company rate, the credit is the dividend multiplied by 30/70, or three sevenths. Partially franked dividends scale the credit by the franking percentage. Companies taxed at the 25% base rate entity rate attach smaller credits (25/75, or one third of the dividend).
| Your marginal rate | Outcome on a fully franked dividend |
|---|---|
| 0% (e.g. retiree, income under $18,200) | Full credit refunded in cash |
| 15% or 16% | Partial refund |
| 30% (plus Medicare) | Roughly square, small top-up for the levy |
| 37% or 45% | Top-up tax to pay on the difference |
Refundable, and why retirees care
Franking credits are a refundable offset. If your credits exceed the tax you owe, the ATO pays you the difference in cash. That is why fully franked shares are popular with SMSFs in pension phase and low-income retirees: a 0% tax rate turns a $700 dividend into $1,000 of pre-tax value, with $300 arriving as a refund after lodgment.
The 45-day rule
To claim credits over $5,000 in a year, you generally need to hold the shares at risk for at least 45 days (90 for some preference shares) around the dividend date. Buying just before a dividend and selling straight after fails the test. Small investors under the $5,000 threshold are exempt.