How Franking Credits Work: The Australian Tax Advantage

If you've ever looked at an ASX dividend payment and seen "100% franked," you've encountered one of Australia's most powerful tax advantages for investors. Franking credits — also called imputation credits — can significantly boost your after-tax returns. Yet many investors don't fully understand how they work.

Note: Tax rules are complex and change frequently. This is general information only — consult a registered tax professional for advice specific to your situation.

What Are Franking Credits?

When an Australian company earns profit, it pays 30% corporate tax before distributing dividends. Franking credits represent this tax already paid on your behalf.

Without franking credits, your dividends would be taxed twice: once at the company level (30%) and again as personal income. Australia's dividend imputation system prevents this double taxation by giving you credit for tax the company already paid.

How the Maths Works

The key formula uses what's called the franking credit multiplier: 0.4286.

This number comes from: 0.30 ÷ (1 - 0.30) = 0.30 ÷ 0.70 ≈ 0.4286

Here's what that means in practice:

The formula: Franking Credit = Dividend × (Franking % ÷ 100) × 0.4286

So a $1.00 fully franked dividend actually represents $1.43 of pre-tax company earnings. You receive $1.00 in cash, and the $0.43 credit offsets your personal tax bill.

Net tax or refund by marginal tax rate on a $1.00 fully franked dividend

Tax Rate	Net Tax/Refund
0% (PAYG threshold)	$0.43 refund
19% (19% bracket)	$0.16 refund
32.5% (32.5% bracket)	$0.03 tax
37% (37% bracket)	$0.10 tax
45% (45% bracket)	$0.21 tax

Simplified illustration based on $1.00 net dividend + $0.43 franking credit. Actual tax outcomes depend on your individual circumstances.

For illustrative purposes only. Consult a registered tax professional for personal advice.

Why Franking Credits Matter for Your Tax Return

Your gross income (dividend + franking credit) is what you declare as taxable income. But you also claim the franking credit as a tax offset.

Example: $10,000 in Fully Franked Dividends

For someone in the 32.5% tax bracket:

1. Cash received: $10,000
2. Franking credits: $10,000 × 0.4286 = $4,286
3. Gross (taxable) income: $14,286
4. Tax on gross income: $14,286 × 32.5% = $4,643
5. Less franking credit offset: -$4,286
6. Actual tax owed: $357

Without franking credits, you'd owe $3,250 in tax on that $10,000. With them, you owe just $357 — a saving of $2,893.

The Refund Scenario

If your marginal tax rate is below 30% (the corporate tax rate), you can actually receive a cash refund for excess franking credits. This is especially powerful for:

• Retirees in the 0% tax bracket — they get the full $4,286 back as cash
• Low-income earners in the 19% bracket — partial refund
• SMSFs in pension phase — 0% tax rate, full refund

This makes fully franked dividends one of the most tax-efficient income sources in Australia.

Fully Franked vs Partially Franked vs Unfranked

For dividend investors, fully franked dividends are the gold standard. They maximise your after-tax income and can even generate refunds depending on your tax situation.

How Franking Affects Dividend Yield

When comparing dividend yields, many investors only look at the cash yield — the dividend divided by the share price. But the grossed-up yield (including franking credits) gives you the true picture of your return.

Example: CBA paying $4.50 per share at $130

• Cash yield: $4.50 ÷ $130 = 3.46%
• Franking credit: $4.50 × 0.4286 = $1.93
• Grossed-up yield: ($4.50 + $1.93) ÷ $130 = 4.95%

That's a 43% increase in effective yield — invisible if you only look at headline numbers.

What Luiz Barsi Would Think

While Barsi developed his 6% rule in Brazil (which has its own dividend tax system), the principle translates perfectly to Australia. His rule says: only buy stocks yielding 6% or more based on the 6-year average dividend.

For Australian investors, franking credits make this easier to achieve. A stock with a 4.5% cash yield and 100% franking effectively yields 6.4% grossed-up — passing Barsi's threshold even though the headline number looks low.

Our stock screener uses cash yields for consistency with Barsi's methodology, but understanding the franking boost helps you appreciate the true value of ASX dividends.

The 45-Day Holding Rule

There's one catch: to claim franking credits, you must hold the shares at risk for at least 45 days (excluding the purchase and sale dates). This rule prevents investors from buying shares just before the ex-dividend date and selling immediately after.

For long-term dividend investors following Barsi's approach, this is irrelevant — you're holding for years, not days. But it's worth knowing if you ever consider short-term trades around dividend dates.

Key Takeaways

1. Franking credits prevent double taxation — they represent corporate tax already paid
2. The multiplier is 0.4286 — a $1 fully franked dividend has $0.43 in credits
3. Grossed-up yield is 43% higher than cash yield for fully franked dividends
4. Low tax brackets benefit most — retirees and SMSFs can get cash refunds
5. 45-day holding rule — must hold shares for 45 days to claim credits

Frequently Asked Questions

Can I get a refund for excess franking credits?

Yes. If your marginal tax rate is below 30% (the corporate tax rate), you receive a cash refund for the excess credits. Retirees on 0% tax can claim the full franking credit as a cash refund, and SMSFs in pension phase also receive full refunds.

What does "100% franked" mean?

A 100% franked dividend means the company has paid the full 30% corporate tax on the profits being distributed. You receive the maximum franking credit of $0.43 for every $1.00 of dividend. Partially franked means only a portion has been taxed at the Australian corporate rate.

Do I need to declare franking credits on my tax return?

Yes. You declare the grossed-up amount (dividend plus franking credit) as taxable income, then claim the franking credit as a tax offset. Your tax agent or online tax return will handle the calculation, but you need the distribution statement from your share registry.

Does the 45-day rule apply to long-term investors?

The 45-day holding rule requires you to hold shares at risk for at least 45 days to claim franking credits. For long-term dividend investors, this is rarely an issue — you only need to be aware of it if buying or selling shares near ex-dividend dates.

Start Exploring

Want to see which ASX stocks offer fully franked dividends with strong fundamentals? Our stock screener analyses 500+ companies using Buffett's quality criteria and Barsi's dividend methodology. See how our scoring methodology works.

New to dividend investing? Start with our ASX Dividend Investing: A Beginner's Guide for a complete overview of building a dividend portfolio.

Related reading:

• SMSF Dividend Strategy — How to maximise franking credit refunds inside your super fund
• CBA vs NAB vs WBC vs ANZ — All Big 4 banks pay 100% franked dividends — see how they compare
• What Is ROE and Why Buffett Wants 20%+ — The quality metric behind the Value Score
• Top 10 ASX Dividend Stocks for 2026 — Most top scorers pay fully franked dividends

Important: This is general information only, not financial advice. Past performance does not guarantee future results. Always do your own research or consult a licensed financial adviser before making investment decisions. See our full disclaimer.