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Franking Credits & Dividend Refunds
How dividend imputation can boost your retirement income — and when you can get cash refunds.
Australia's dividend imputation system is one of the world's most generous tax features for shareholders. When Australian companies pay tax on their profits and then distribute dividends, shareholders receive credits for that tax already paid. For retirees with low taxable incomes, these franking credits can be refunded as cash — essentially providing a tax-free bonus on top of your dividend income.
Understanding how franking credits work is essential for building a tax-effective retirement income strategy, especially if you hold Australian shares outside superannuation.
What Are Franking Credits?
When an Australian company earns a profit, it pays company tax at 30% (or 25% for smaller companies). When it distributes some of that profit as dividends, shareholders can receive a credit for the tax already paid — this is the "franking credit" or "imputation credit."
The Core Concept
Without imputation, company profits would be taxed twice: once when the company earns it (company tax), and again when shareholders receive it (personal income tax).
Franking credits prevent this double taxation by giving shareholders credit for tax the company already paid.
How Franking Credits Flow
The shareholder receives $70 cash plus a $30 franking credit, representing $100 of "grossed-up" dividend income.
Fully Franked vs Partially Franked vs Unfranked
Not all dividends are created equal. The franking level depends on how much company tax was paid on the underlying profits:
| Dividend Type | What It Means | Example ($70 cash dividend) |
|---|---|---|
| Fully franked | Company paid full 30% tax on profits | $70 cash + $30 franking credit = $100 grossed-up |
| Partially franked (e.g., 50%) | Only some of the profit was taxed in Australia | $70 cash + $15 franking credit = $85 grossed-up |
| Unfranked | No company tax paid (e.g., foreign income) | $70 cash only, no franking credit |
Companies with primarily Australian operations (like banks, Telstra, BHP's Australian operations) typically pay fully franked dividends. Companies with significant international operations may have partially franked or unfranked dividends.
How Franking Credits Work on Your Tax Return
When you receive a franked dividend, you include the grossed-up amount (cash dividend + franking credit) in your assessable income. You then receive a tax offset equal to the franking credit.
Example: Franking Credit Tax Calculation
Scenario: Barbara receives a $700 fully franked dividend from Commonwealth Bank.
Franking credit (30/70 × $700): $300
Grossed-up dividend (assessable income): $1,000
Tax on $1,000 at Barbara's marginal rate (say 19%): $190
Less franking credit offset: -$300
Net tax position: -$110 (refund!)
Because Barbara's tax liability ($190) is less than her franking credits ($300), she receives a $110 refund — cash back from the ATO.
Refundable Franking Credits for Retirees
This is where it gets interesting for retirees. Since 2000, excess franking credits have been fully refundable. If your franking credits exceed your tax liability, the ATO pays you the difference.
Who Benefits Most from Franking Refunds?
Low-income retirees: With the tax-free threshold ($18,200), SAPTO, and LITO, many retirees have zero or very low tax liability. All their franking credits become cash refunds.
Self-funded retirees: Those not receiving Age Pension but with modest incomes still benefit significantly.
SMSFs in pension phase: Zero tax rate means 100% of franking credits are refunded to the fund.
Example: Retiree Receiving Full Franking Refund
Scenario: Graham, 70, is a single self-funded retiree. His only income is $35,000 from an account-based pension (tax-free over 60) and $7,000 in fully franked dividends ($3,000 franking credits).
Tax on $10,000: $0 (below tax-free threshold)
Franking credits: $3,000
Tax liability: $0
Franking credit refund: $3,000
Graham receives his $7,000 cash dividends plus a $3,000 ATO refund — $10,000 total from a $7,000 cash outlay by the companies.
The 45-Day Rule (Holding Period Rule)
To prevent people from buying shares just before dividends are paid (to capture franking credits) and selling immediately after, there's an anti-avoidance rule:
The 45-Day Rule
To claim franking credits, you must hold the shares "at risk" for at least 45 days (90 days for preference shares) during a qualifying period around the ex-dividend date.
Exception: If your total franking credits for the year are $5,000 or less, the rule doesn't apply. Most individual retirees fall under this threshold.
Franking Credits Inside vs Outside Super
Where you hold your dividend-paying shares affects how franking credits work:
| Location | Tax Rate on Earnings | Franking Credit Treatment |
|---|---|---|
| Outside super (personal name) | Your marginal tax rate (0-45%) | Offset against tax; excess refunded to you |
| Super - Accumulation phase | 15% | Offset against 15% tax; excess refunded to fund |
| Super - Pension phase | 0% | 100% refunded to fund (no tax to offset against) |
This is why SMSFs in pension phase love fully franked Australian shares — the entire franking credit (effectively 30% of the grossed-up dividend) is refunded to the fund, boosting returns significantly.
ETFs vs LICs: Franking Credit Differences
When investing in Australian shares through funds, the structure matters for franking credits:
ETFs (Exchange-Traded Funds)
- Pass through franking credits to investors via distributions
- You receive franking credits proportional to your distribution
- Credits flow through annually with your distribution statement
- Examples: VAS, A200, IOZ
LICs (Listed Investment Companies)
- Are companies themselves, so they can retain and accumulate profits
- Pay their own fully franked dividends (at company tax rate)
- May have "LIC capital gains" deduction available
- Dividend timing/amount controlled by the company
- Examples: AFI, ARG, MLT, WHF
Both structures pass through franking credits effectively. LICs offer more control over when you receive income (they can smooth dividends), while ETFs pass through whatever the underlying companies distribute.
Strategies for Maximising Franking Credit Value
Franking Credit Optimisation Tips
1. Focus on fully franked dividends — Australian banks, Telstra, and established ASX companies typically pay fully franked.
2. Consider personal ownership — If you're a low-income retiree, holding shares personally (not in super) means refunds come to you directly.
3. Understand your tax position — Franking credits are most valuable when your tax rate is below 30%. Above 30%, you'll owe additional tax.
4. Don't chase yield alone — A company paying unsustainable dividends may cut them. Focus on quality companies with reliable franked dividends.
When Franking Credits Are Less Valuable
Franking credits become less advantageous (or even create extra tax) when:
• Your marginal tax rate is above 30% — you'll owe additional tax on the grossed-up dividend
• You don't hold shares for the 45-day period (and exceed the $5,000 threshold)
• The company isn't profitable enough to frank dividends
• You're investing for growth rather than income (franking only matters if dividends are paid)
Franking Credits and Centrelink
For Age Pension purposes, franking credits don't directly affect your assessment. Centrelink uses deeming based on your total share balance — the actual dividends and franking credits you receive are irrelevant to your Centrelink income test.
However, franking credit refunds you receive are not counted as income for Centrelink purposes — they're tax refunds, not investment income. This makes fully franked dividends particularly attractive for pensioners: you get the grossed-up value via refunds without any increase to your deemed income.
Want to Optimise Your Dividend Strategy?
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Important Information
This information is general in nature and does not consider your personal circumstances. Tax rules around franking credits are complex and may change. Always consult with a tax professional or financial adviser for advice specific to your situation.
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Last updated: January 2026