Franking credits: the tax refund hiding in your share portfolio

Every dividend statement from an Australian company carries a line that confuses new investors: “franking credit.” Most people skim past it. That line is money, sometimes a lot of it, and depending on your tax rate it can turn a 4% dividend yield into something closer to 5.7%. Almost nowhere else in the world works this way.

The problem franking solves

In most countries, company profits are taxed twice. The company pays corporate tax, then shareholders pay income tax on the dividend paid from what's left. Australia decided in 1987 that this was double dipping and introduced dividend imputation. The idea: company tax is treated as a prepayment of the shareholder's own tax.

So when CBA pays the 30% company rate on its profits and then sends you a dividend, the dividend arrives with a credit attached for the tax already paid. That's the franking credit. “Fully franked” means tax was paid on the whole amount at 30%. Partially franked means some of the profit came from sources that weren't taxed in Australia.

The maths, with real numbers

Say you receive a $700 fully franked dividend. The company already paid $300 of tax to get that $700 to you ($1,000 of pre-tax profit, taxed at 30%). At tax time you declare the full $1,000 (this is called grossing up), then claim the $300 credit against your own tax bill.

One note on that 16% row: it's legislated to fall to 15% from 1 July 2026 and 14% from 1 July 2027, which nudges the refund for low-bracket investors slightly higher each year.

That last row explains a lot of Australian retirement planning. A super fund paying a retirement pension pays no tax on its earnings, so every franking credit comes back as cash. A retiree holding $500,000 of fully franked shares yielding 4% collects $20,000 in dividends plus roughly $8,500 in refunded credits. The refund alone is a part-time wage.

Who actually benefits

If your marginal rate is above 30%, the credit reduces your top-up tax but you still owe something. If you're below 30%, you get money back. The biggest winners are retirees in pension phase, low-income investors, and anyone holding Australian shares inside super, where the fund's 15% rate sits comfortably below the 30% credit.

This is also why Australian investors are famously overweight their own market. The home bias gets criticised, with reason, but it isn't irrational. A fully franked 4% yield is genuinely worth more to an Australian taxpayer than an unfranked 4% yield from a US stock.

The yield trap

Here's where it goes wrong. Investors see a fully franked 7% yield and stop thinking. A high franked yield often signals a mature company with no better use for its cash, or a share price that has fallen for good reason. The dividend can be cut. The capital can shrink faster than the credits accumulate. Anyone who held the big banks through 2020 watched supposedly reliable franked dividends get halved within months.

A franking credit makes a good investment better. It does not make a bad investment good.

The sensible approach treats franking as a bonus on a company you'd want to own anyway, not as the reason to own it. Total return still rules: dividends plus credits plus growth, minus what you lose when a tired business slowly deflates.

The practical bit

You don't need to do much. Your broker's annual tax statement and your fund's reports include the credits, and pre-fill in myTax usually picks them up. One rule worth knowing: the 45-day holding rule says you must hold shares at risk for at least 45 days to claim credits over $5,000 in a year. It mostly catches active traders, not long-term holders. If that's you, talk to an accountant before tax time rather than after.