A Guide to Franking Credits

Why fully franked dividends are still Australia’s quiet super-power for investors on up to $135,000 a year.

1. What is franking, in plain English?

When an Australian company pays tax on its profits (generally at 30 %), it records that tax in a franking account. Each $1 of tax paid becomes $1 of franking credit. When the company later pays a dividend, it can attach those credits. Shareholders then:

1. Include the grossed-up dividend in their taxable income (cash dividend + franking credit).

2. Claim the franking credit as a tax offset.

   • If their marginal rate is ≤ 30 %, the credit wipes out the tax on that dividend.

   • If their rate is > 30 %, they only pay the difference.

   • If they pay no tax, the ATO refunds the credit in cash.

     
     

From 1 July 2024, most individuals earning up to $135,000 fall in or below the new 30 % bracket, so fully franked dividends can be received tax-free (or generate refunds) for them.

2. Why many investors miss out

Audience surveys still show blank faces when “franking credits” are mentioned. The most common myths:

Myth	Reality
“I don’t get the dividend, it’s reinvested, so nothing to declare.”	You still receive a franking credit even if you take shares instead of cash.
“Credits only offset dividend tax.”	They offset total tax payable and are refundable if unused.
“High yields beat franked dividends.”	A 5 % fully franked yield is effectively 7.1 % pre-tax for a 37 % taxpayer and 5 % after-tax for someone on 30 %.

3. Worked example – a salary earner on $130,000

	Cash	Franking	After-tax result (30 % bracket)
Dividend received	$4 000	$1 714 (gross-up to $5 714)	$0 tax (credit covers liability)
Capital growth (unrealised)	$5 000	n/a	No CGT until sold
Total annual return	$9 000	—	Entire cash dividend effectively tax-free

4. Case study – ANZ shareholder

Client, age 76, ANZ Shares; participates in Dividend Reinvestment Plan (DRP)

Dividend - $4,730 (cash value) per year DRP shares acquired – Approx. 155 per year Franking credit - $2,028

She reinvested the cash but ignored the credit. We reviewed six years of statements and over $12 000 of unclaimed franking credits were sitting with the ATO. By lodging late returns she received a full refund, money entirely missed because the credits were invisible inside the DRP paperwork.

6. Key take-aways for high-income retirees and business owners

• Fully franked Australian shares can add a pure after-tax yield to portfolios otherwise dominated by property or international equities.

• Credits carry through trusts and can be streamed to beneficiaries with lower tax rates, boosting family-group efficiency.

• In SMSFs, franking credits still offset the 15 % fund tax (and can generate refunds for accounts in both accumulation pension phase).

Final word

Franking credits remain one of the most generous, and most overlooked, features of Australia’s tax system. Whether you’re accumulating wealth or drawing an income stream, understanding and correctly claiming those credits can add thousands of after-tax dollars to your bottom line each year.

If you’re unsure whether you are making the most of franking in your personal or business structures, feel free to contact our office.