Why Do We Need Franking Credits?
Preventing Double Taxation
The primary purpose of franking credits is to eliminate double taxation. Without this system, company profits would be taxed twice:
- First, when the company pays company tax on its profits (currently 25% for base rate entities – generally companies with aggregated turnover under $50 million and no more than 80% passive income – and 30% for other companies)
- Second, when shareholders pay personal income tax on dividends received
Australia introduced dividend imputation on 1 July 1987. Since 1 July 2000, excess franking credits have also been refundable: if your credits are more than the tax you owe, the ATO pays you the difference. That's why franking credits can produce a cash refund for low-income earners, retirees and super funds.
Encouraging Investment in Australian Companies
Franking credits make Australian shares more attractive to Australian investors, particularly those in lower tax brackets or retirees. This system encourages domestic investment and facilitates Australian companies' access to capital more easily.
Supporting Retirees and Low-Income Earners
For retirees and low-income earners, franking credits can result in cash refunds from the ATO. This feature makes Australian dividend-paying shares particularly attractive for retirement planning and income generation strategies.
Creating Tax Efficiency
Franking credits can reduce your overall tax liability or even result in refunds, making them a powerful tool for tax-efficient investing and retirement planning.
Why Is Tracking Franking Credits Crucial?
Maximising Tax Benefits
Proper tracking ensures you claim all available franking credits. Missing even small amounts can add up to significant losses over time, especially for investors with substantial share portfolios.
Accurate Tax Return Preparation
The ATO requires precise reporting of franking credits. Inaccurate reporting can trigger audits, penalties, or missed refund opportunities. Your dividend statements show both the cash dividend and the franking credit amount – both must be included in your tax return.
Investment Decision Making
Understanding your franking credit position helps inform investment decisions. For some investors, the after-tax return including franking credits makes Australian shares more attractive than international investments or other asset classes.
Cash Flow Planning
For retirees and low-income earners, franking credit refunds can account for a substantial portion of their annual income. Accurate tracking enables more effective financial planning and improved cash flow management.
Who Needs to Deal with Franking Credits?
Individual Shareholders
Any individual who owns shares in Australian companies that pay franked dividends must report these in their tax return. This includes:
- Direct shareholdings
- Managed fund distributions that include franking credits
- Exchange-traded fund (ETF) distributions
- Shares held in family trusts
Self-Managed Super Fund (SMSF) Trustees
SMSFs that hold Australian shares are required to track and report franking credits. In accumulation phase a complying fund pays 15% tax, so the credit on a dividend from a company taxed at 30% more than covers it: on a $700 fully franked dividend ($300 credit, $1,000 grossed up), the fund's tax is $150 and the other $150 reduces tax on the fund's other income or is refunded. In the pension (retirement) phase, income supporting pensions is generally tax-free, so SMSFs can often claim full refunds of franking credits, making them particularly valuable.
Companies and Trusts
Corporate entities, trusts and partnerships that receive franked dividends must track these credits. Trusts and partnerships can pass them on to beneficiaries and partners, who claim them in their own tax returns, while companies use them to offset their own tax and can pass them on by franking their own dividends. Unlike individuals and complying super funds, companies can't get a cash refund of excess franking credits, although the excess can generally be converted into a tax loss to carry forward.
Retirees and Low-Income Earners
These groups often benefit most from franking credits, as they may receive cash refunds when their marginal tax rate is lower than the company tax rate used to frank the dividends.
Non-Resident Shareholders
If you're a non-resident for tax purposes, the franked part of a dividend isn't subject to dividend withholding tax, but you can't use the franking credit as a tax offset or get it refunded. The unfranked part has withholding tax deducted at 30%, or at the lower rate in the tax treaty with your country of residence (commonly 15%). Unfranked amounts declared to be conduit foreign income are exempt. Withholding is a final tax, so these dividends don't go in an Australian tax return.
Understanding the Franking Credit System
How Franking Credits Work
When an Australian company pays tax on its profits and then distributes those profits as dividends, it can "frank" those dividends by attaching franking credits. The franking credit represents the tax that has already been paid by the company.
Example:
- The company earns $100 profit
- Pays $30 company tax (30% rate)
- Has $70 available for dividends
- Pays $70 dividend with $30 franking credit attached
- Shareholder reports $100 total income ($70 cash + $30 franking credit)
- Shareholder gets $30 credit against their personal tax liability
The franking credit follows the company's tax rate. A company taxed at 25% (a base rate entity) that pays a $75 fully franked dividend attaches a $25 franking credit, so the shareholder still declares $100. To work out the credit on a fully franked dividend: dividend × company tax rate ÷ (1 − company tax rate), e.g. $70 × 0.30 ÷ 0.70 = $30.
Fully Franked vs. Partially Franked Dividends
- Fully franked: The entire dividend has franking credits attached
- Partially franked: Only part of the dividend has franking credits attached
- Unfranked: No franking credits attached (often from companies that haven't paid Australian tax)
Worked example at 2025–26 rates: Say you receive $7,000 of fully franked dividends from a company taxed at 30%, with $3,000 of franking credits attached. You declare $10,000 of income and claim a $3,000 tax offset. Assuming all $10,000 is taxed at your marginal rate (and ignoring other offsets):
- No tax payable (e.g. income under the $18,200 tax-free threshold, or an SMSF paying retirement-phase pensions): tax $0, so the full $3,000 is refunded and you keep $10,000
- Low earner on the 16% rate (below the Medicare levy threshold): tax $1,600 less the $3,000 credit, so $1,400 is refunded and you keep $8,400
- Middle earner on 30% plus the 2% Medicare levy (32%): tax $3,200 less the $3,000 credit, so $200 extra to pay and you keep $6,800
- Top earner on 45% plus the 2% Medicare levy (47%): tax $4,700 less the $3,000 credit, so $1,700 extra to pay and you keep $5,300
- From 1 July 2026 the 16% rate falls to 15%, so in 2026–27 the low earner's refund rises to $1,500 and they keep $8,500
Franking Credits and Company Tax Returns: Timing and Lodgement
When Are Franking Credits Dealt With?
Franking credits are not "lodged" separately – they're reported as part of your annual tax return. However, the timing depends on your entity type:
Individual Tax Returns: Franking credits are reported at item 11 (Dividends) of your individual tax return – unfranked amounts at label S, franked amounts at label T and franking credits at label U. Self-lodgers have until 31 October; if you use a registered tax agent, your 2025–26 return is generally due by 15 May 2027.
Company Tax Returns: Companies that pay franked dividends must keep a franking account and give shareholders a distribution statement. If the franking account is in deficit at the end of the income year, the company must lodge a franking account tax return and pay franking deficit tax, generally by 31 July. The company's own income tax return is due later – for most companies lodging through a tax agent, by 15 May the following year (some larger companies have earlier dates).
SMSF Returns: SMSFs report franking credits in their annual return, due by the SMSF lodgement deadline.
Payment and Refund Timing
Franking credits don't involve separate payments – they're credits that reduce your tax liability or create refunds. The timing aligns with your tax return processing:
- Tax Refunds: If franking credits create a refund, the ATO typically processes these within 12 business days for electronic returns
- Tax Liabilities: If you owe tax after franking credits are applied, payment is due by the date on your notice of assessment – generally 21 November if you lodge your own return
Consequences of Late or Incorrect Reporting
Missed Refund Opportunities
Late lodgement means delayed refunds. For retirees relying on franking credit refunds for income, this can have a significant impact on cash flow and financial planning.
Penalties and Interest
While franking credits themselves don't attract penalties, late lodgement of tax returns containing franking credits can result in:
- Failure to lodge penalties
- General interest charges on any outstanding tax liabilities
- Lost opportunity cost on delayed refunds
ATO Scrutiny
Incorrect franking credit reporting can trigger an ATO review or audit. The ATO has sophisticated data matching systems that compare your reported franking credits against company records.
Compounding Errors
Errors in franking credit reporting can compound over multiple years, making corrections more complex and potentially costly.
When Are Franking Credit Benefits Realised?
Annual Tax Return Processing
Franking credits are typically claimed and refunded annually through the tax return process. However, the benefits can be realised at different times:
Immediate Benefits: If you pay PAYG instalments, you may be able to vary them to reflect the franking credits you expect to receive, which improves cash flow during the year.
Refund-Only Claims: If you don't need to lodge a tax return (for example, some retirees whose only income is dividends), you can apply for a refund of franking credits any time after 1 July – online through myGov, by phone or by post. The ATO also refunds some eligible people automatically without an application.
Annual Benefits: Most individual taxpayers realise franking credit benefits annually when their tax return is processed.
Who Benefits Most from Franking Credits?
Retirees and Low-Income Earners
These groups often have marginal tax rates below the company tax rate, allowing them to receive cash refunds of excess franking credits. This makes Australian dividend-paying shares particularly attractive for retirement income strategies.
SMSF Members in Pension Phase
SMSFs paying pensions typically pay no tax, allowing them to claim full refunds of franking credits. This can significantly boost retirement income.
Tax-Efficient Investors
Investors who understand how to structure their affairs to maximise franking credit benefits can achieve superior after-tax returns compared to those who ignore these opportunities.
Long-Term Wealth Builders
The compounding effect of franking credit refunds reinvested over time can significantly enhance long-term wealth accumulation.
Common Franking Credit Mistakes to Avoid
Failing to Report Franking Credits
Some taxpayers only report the cash dividend and forget to include the franking credit. This is incorrect – both amounts must be reported as assessable income.
Incorrect Franking Credit Amounts
Using incorrect franking credit amounts, resulting from misreading dividend statements or outdated information, can lead to over- or under-claiming credits.
Missing Managed Fund Franking Credits
Managed funds and ETFs often distribute franking credits, but these can be easy to overlook if you don't carefully review your annual tax statements.
Relying on Pre-filled Data
myTax pre-fills the dividends the ATO has received from companies, but the data can be incomplete or wrong. Check every franked amount, unfranked amount and franking credit against your dividend statements, and add any dividends that didn't pre-fill.
Poor Record Keeping
Inadequate records of dividend statements and franking credit entitlements can lead to missed opportunities or compliance issues.
How AWTS Maximises Your Franking Credit Benefits
Expert Knowledge Across Investment Structures
Our team understands franking credits across all investment structures – individual holdings, family trusts, companies, and SMSFs. We ensure you're maximising benefits regardless of how you hold your investments.
Comprehensive Review Process
We don't just enter the numbers from your dividend statements. Our review process cross-checks franking credit calculations against multiple sources to ensure accuracy and completeness.
Strategic Tax Planning
We help you understand how franking credits fit into your overall tax strategy, including:
- Optimal investment structures for your circumstances
- Timing strategies for dividend-paying investments
- Integration with other tax planning opportunities
Industry-Specific Expertise
Whether you're a medical professional with significant investments, a tradesperson building wealth through shares, or involved in e-commerce with complex investment structures, we understand how franking credits apply to your specific situation.
Advanced Franking Credit Strategies
Dividend Stripping Rules
The ATO has rules to prevent artificial schemes to claim franking credits. We ensure your investment strategies comply with these rules while maximising legitimate benefits.
45-Day Rule
To claim franking credits, you generally must hold the shares "at risk" for at least 45 days (90 days for preference shares), not counting the days you buy and sell them. Days on which you've hedged away more than 70% of the risk (for example, with options) don't count. Under the small shareholder exemption, the rule doesn't apply if your total franking credit entitlement for the year is $5,000 or less (about $11,666 of fully franked dividends from a company taxed at 30%), as long as the related payments rule doesn't apply. If you fail the rule, you still declare the dividend but can't claim the franking credit. We help ensure your trading strategies don't inadvertently breach these rules.
Franking Credit Trading
Some investors buy shares shortly before they go ex-dividend to collect the franking credit. The 45-day rule and the dividend washing integrity rule (which denies the credit on a second dividend received from substitute shares) limit this, so we can help you understand when it makes sense and when it doesn't.
Red Flags: When Your Current Accountant Isn't Maximising Your Franking Credits
Warning Signs You're Missing Out
If you're experiencing any of these issues, you may not be getting the full benefit of your franking credits:
Generic Investment Advice: If your accountant doesn't discuss how franking credits impact your investment strategy, you're missing out on opportunities.
Delayed Processing: If your tax returns are consistently lodged late, you may be delaying franking credit refunds and potentially missing out on planning opportunities.
No Discussion of Investment Structures: If your accountant hasn't discussed whether your current investment structure optimises franking credit benefits, you may be paying more tax than necessary.
Errors in Previous Returns: If you've had franking credit errors in previous returns, it suggests your accountant may not have the expertise to handle investment taxation properly.
No Proactive Communication: If your accountant only contacts you at tax time and doesn't provide ongoing advice about investment taxation, you're not getting full value.
Take Action: Don't Let Franking Credit Opportunities Slip Away
Why Professional Expertise Matters
Franking credits represent real money – often thousands of dollars annually for investors with substantial Australian share portfolios. Getting this wrong doesn't just cost you current refunds; it can impact your long-term wealth-building strategy.
The AWTS Advantage
Specialised Investment Knowledge: Our team includes specialists in investment taxation who understand the nuances of franking credits across different investment structures.
Comprehensive Service: We don't just prepare your tax return – we provide strategic advice on how to structure your investments to maximise after-tax returns.
Technology Integration: Our systems automatically cross-check franking credit calculations and flag potential issues before they become problems.
Proactive Planning: We provide ongoing advice throughout the year, not just at tax time, helping you make informed investment decisions.
Ready to Maximise Your Franking Credit Benefits?
Don't let another tax year pass without ensuring you're getting the full benefit of your franking credits. Whether you're a retiree looking to maximise income, an investor building long-term wealth, or a business owner with complex investment structures, AWTS has the expertise to help.
Contact Australia Wide Tax Solutions today: Phone: 0488 854 200 Website: awts.net.au
Office: 58/20-40 Meagher St, Chippendale NSW 2008
Our Sydney office is open Monday to Friday, 9am to 6pm, with online consultations available for your convenience.
Remember, with a comprehensive approach to investment taxation, you're not just getting tax compliance – you're getting strategic advice that can strengthen your long-term financial position.
How do I get help with this from the ATO?
The ATO provides guidance through ato.gov.au, the Small Business Support Line (13 28 66), and Online Services for individuals and businesses. For complex situations, a registered tax agent provides advice tailored to your specific circumstances and professional indemnity protection. You can verify agent registration at the TPB register at tpb.gov.au.
What records do I need to keep for tax purposes in Australia?
Most tax records must be kept for five years from the date of lodgement or the date the transaction occurred, whichever is later. Records must be in English or convertible to English and must be sufficient to explain the income and deductions in your return. The ATO can request records at any time during the retention period.
When do I need a registered tax agent in Australia?
Consider a registered tax agent when your affairs involve multiple income sources, business activity, investment properties, capital gains, or overseas income. Agents extend your lodgement deadline, provide safe harbour protection, and take professional responsibility for the advice given. Verify registration at tpb.gov.au.
How does the ATO calculate penalties for compliance failures?
The failure to lodge penalty is based on penalty units ($364 per unit from 1 July 2026), accruing per 28-day period for late returns and BAS lodgements. Incorrect information penalties range from 25% to 75% of the tax shortfall depending on whether the behaviour was careless, reckless, or intentional. Proactive disclosure before an audit begins typically results in significantly reduced penalties.
What is the difference between tax avoidance and tax minimisation?
Tax minimisation is the legal arrangement of your affairs to reduce tax — claiming all eligible deductions, using appropriate structures, and timing income and expenses. Tax avoidance involves arrangements that technically comply with the law but achieve outcomes parliament did not intend. The ATO can apply Part IVA anti-avoidance rules to cancel benefits from avoidance arrangements.
