How the dividend imputation system works, what it means for your tax return, and who gets a cash refund.
If you own shares in an Australian company — directly or through an ETF — you have almost certainly received dividends with franking credits attached. For many investors, especially those with a lower taxable income or money inside superannuation, these credits are worth significant dollars. But the gross-up calculation confuses people, and the 45-day holding rule catches some investors off-guard. This guide walks through the whole system from first principles.
When a company makes a profit in Australia, it pays corporate income tax — currently 30% for large companies, or 25% for companies with an aggregated annual turnover under $50 million (known as base rate entities). After paying that tax, it distributes the remaining profit as a dividend. Without some form of relief, the shareholder would then pay income tax again on the same dollars, resulting in the profit being taxed twice: once in the company's hands and again in yours.
Australia's dividend imputation system, introduced in 1987, solves this by allowing the company to pass its tax payment to shareholders as a credit. The shareholder grosses up the dividend to the pre-tax amount, pays their own marginal rate on that gross amount, and offsets the company's tax payment against their liability. The net effect is that company profits flowing to shareholders are taxed only once — at the shareholder's personal marginal rate, not the company rate plus the personal rate.
The franking credit attached to a fully franked dividend is calculated using the corporate tax rate that applies to the paying company. For a company taxed at 30%, the formula is: franking credit = cash dividend × (30 ÷ 70). For a company taxed at 25%, it is: cash dividend × (25 ÷ 75).
Your dividend statement shows the cash amount, the franking percentage, and the dollar value of the credit. You do not need to calculate it yourself — but understanding the maths helps you estimate your after-tax position before the dividend arrives.
| Cash dividend | Company tax rate | Franking credit | Grossed-up dividend |
|---|---|---|---|
| $700 | 30% | $300 | $1,000 |
| $750 | 25% | $250 | $1,000 |
| $350 | 30% (50% franked) | $150 | $500 gross + $350 unfranked = $850 assessable |
| $1,000 | Unfranked | $0 | $1,000 |
When you lodge your tax return, you include the grossed-up dividend — cash received plus the franking credit — as part of your assessable income. Your marginal rate then applies to the whole grossed-up amount. The franking credit is then subtracted dollar-for-dollar from your tax bill. The ATO's refund of franking credits page explains the lodgment process in detail.
Here's how the same $700 fully franked dividend (30% rate, $300 credit) plays out at different marginal rates.
| Marginal rate | Tax on $1,000 grossed-up | Less franking credit | Net tax (or refund) |
|---|---|---|---|
| 0% (below tax-free threshold) | $0 | −$300 | Refund of $300 |
| 19% | $190 | −$300 | Refund of $110 |
| 32.5% | $325 | −$300 | Net tax of $25 |
| 37% | $370 | −$300 | Net tax of $70 |
| 45% | $450 | −$300 | Net tax of $150 |
These figures use 2025-26 marginal rates and exclude Medicare levy for clarity. In reality, the 2% Medicare levy would add a small amount to each row. For high-income earners, the Medicare Levy Surcharge may also apply. The point is clear though: investors on lower incomes benefit more from franking credits than those in the top bracket, because the company has already paid more tax than they would owe personally.
One of the most powerful features of the Australian imputation system is that franking credits are fully refundable. If your total franking credits for the year exceed your total tax liability — after all offsets — the ATO pays you the difference in cash. This is not a deduction; it is a genuine payment.
Retirees drawing on a superannuation pension with shares held personally, or people who work part-time and sit in the 0% or 19% bracket, are the most common beneficiaries. If you do not need to lodge a tax return but still receive franked dividends, you can apply for a refund separately using the ATO's franking credit refund application. You still need to meet the integrity rules described below.
Not every dividend carries a full franking credit. A company might pay a partially franked dividend if it has used up part of its franking account (a ledger the ATO maintains for each company to track tax paid), or if some of its income came from overseas where Australian corporate tax was not paid. An unfranked dividend carries no credit at all and is simply included in your assessable income at its full cash value.
Your dividend statement will clearly state the franking percentage and the dollar credit. When calculating your tax, you apply the credit only to the franked portion. The unfranked portion is taxed like any other income.
The ATO introduced integrity rules to prevent people from buying shares shortly before a dividend, collecting the franking credit, and immediately selling. The most important of these is the holding period rule. If your total franking credit entitlements for the income year are $5,000 or more, you must have held each parcel of shares "at risk" for at least 45 continuous days (not counting the day of purchase or disposal) during the 90-day window surrounding the dividend record date. For preference shares, the period extends to 90 days in a 180-day window.
"At risk" means you have not entered into any arrangement that eliminates your exposure to price movements — for example, a put option that locks in a sale price. Simply holding the shares while being exposed to market fluctuation is sufficient.
The good news for most ordinary investors: under the small shareholder exemption, if all your franking credit entitlements for the year total less than $5,000, the holding period rule does not apply. This threshold is roughly equivalent to receiving a fully franked dividend of around $11,700 from a 30% company. You still need to satisfy the related payments rule, which prevents you from passing the economic benefit of the dividend to someone else before it arrives.
Superannuation funds in accumulation phase pay tax at 15% on investment income, including dividends. Because the company has already paid 30% tax on fully franked dividends, the franking credits it passes through are often larger than the super fund's 15% liability on those dividends. The result is a refund within the fund — in effect, Australian dividend-paying shares produce higher after-tax returns inside super than most other asset classes would suggest from the headline yield alone. Funds in retirement (pension) phase pay 0% tax, so every franking credit is a pure refund to the fund.
This is one of the reasons long-term wealth builders and retirees holding diversified Australian equity inside super often find the strategy highly tax-efficient without needing to do anything special.
If you receive dividends through a trust or partnership, the franking credits flow through to you as a beneficiary or partner, provided both you and the trust or partnership satisfy the integrity rules. Discretionary trusts have some additional complexity: a beneficiary of a discretionary trust generally cannot satisfy the holding period rule unless the trust has made a family trust election. Your distribution statement from the trust should show your share of any franking credits received.
Disclaimer: This guide offers general information about Australia's franking credit system and is not intended as financial or tax advice. Individual circumstances vary significantly. Always refer to the official ATO franking credits page for the latest rules, and consult a qualified tax professional for advice tailored to your situation.