Franked Dividends, Australia’s Hidden Wealth-Building Advantage

What are franking credits?

Australian dividend investing has a distinct advantage over most international markets, and it comes down to one key feature. Franked dividends. Franked dividends are payments from Australian companies that have already paid tax, and this tax is passed to the shareholder as a “franking credit”. Franking credits are tax credits representing the 30% company tax already paid on profits before dividends are distributed, preventing double taxation.

Types of franking

• Fully franked: The entire dividend carries the maximum credit, as 100% of the tax has been paid.
• Partly franked: Only a portion of the dividend has tax paid, so it carries a partial credit.
• Unfranked: No tax has been paid by the company on this portion, so it’s taxed as regular income.

How this benefits Australian investors

Investors report the grossed-up dividend (cash + credit) in their tax return and use the credit to reduce their personal tax liability, potentially receiving a refund if their personal marginal tax rate is lower than the company’s. This system, also called imputation, benefits investors by reducing their final tax bill.

For example, when you receive a fully franked $700 dividend, there’s an attached $300 franking credit, bringing your total taxable income to $1,000.

The mathematics becomes compelling at different tax rates:

• If your marginal rate is 30%: You owe $300 tax on that $1,000, but the franking credit offsets this completely, the income is effectively tax-free.
• If your rate is below 30% (e.g. retirees, low-income earners): You receive a cash refund for unused franking credits. The ATO automatically processes franking credit refunds for eligible individuals through the tax return system. From 2025, the ATO automatically refunds franking credits to eligible individuals over 60.
• If your rate exceeds 30% (high earners): You pay only the difference, a $700 dividend at a 37% marginal rate means paying just $70 additional tax.

For example, when factoring in franking credits, BHP’s forecast 5% dividend yield becomes a 7.5% grossed-up yield, transforming good returns into exceptional ones for Australian residents.

Further resources:

• ATO Guide to Franking Credits for Individuals
• ASX Dividend Calendar & Information