How franking credits work
When an Australian company pays tax on its profit and then pays you a dividend from that profit, it passes on a franking credit for the tax already paid. This is dividend imputation: it stops the same profit being taxed twice, once in the company’s hands and again in yours. You add the credit to your cash dividend to get the grossed-up dividend, declare that grossed-up figure as income, work out the tax on it at your own marginal rate, then subtract the franking credit as an offset. The formula for the credit is dividend × (company tax rate ÷ (1 − company tax rate)) × franking percentage. At the 30% company rate a fully franked dividend is grossed up by 30 ÷ 70, so a $700 dividend carries a $300 credit and grosses up to $1,000.
When you get a franking credit refund
Because the credit is an offset, the outcome depends on your marginal rate against the company rate. If your marginal rate is higher than the company rate, the credit covers part of the tax and you pay the rest. If it is lower, the credit is larger than the tax and the difference is refunded to you in cash. Australia is one of the few countries that refunds excess imputation credits, which is why retirees, low-income earners and self-managed super funds in pension phase can receive money back even when they pay little tax. On our $1,000 grossed-up example: at a 0% rate the whole $300 credit is refunded; at 32% (30% plus the 2% Medicare levy) the tax is $320, so you pay $20; at 47% the tax is $470, so you pay $170.
Fully franked vs partially franked
A fully franked dividend carries a credit for the full company tax paid, so its franking percentage is 100%. A partially franked dividend has tax paid on only part of it, so the franking percentage is lower and the credit is smaller. An unfranked dividend carries no credit, so the whole amount is taxed at your marginal rate with nothing to offset it. Your dividend statement shows the franking percentage, so set it in the calculator to match, along with the 30% or 25% company rate for a base rate entity.
Frequently asked questions
How do you calculate a franking credit?
Franking credit = dividend × (company tax rate ÷ (1 − company tax rate)) × franking percentage. For a fully franked dividend at the 30% company rate that is dividend × (30 ÷ 70), or dividend × 0.42857. So a $700 fully franked dividend carries a $300 franking credit. If the company is a base rate entity taxed at 25%, use 25 ÷ 75 instead.
What is the current franking credit rate?
It follows the company tax rate. Most large Australian companies are taxed at 30%, so a fully franked dividend is franked at 30%. Smaller companies that qualify as base rate entities (aggregated turnover under $50 million and no more than 80% passive income) are taxed at 25% and frank at 25%. This calculator has a toggle for both.
Do I need to pay tax on fully franked dividends?
It depends on your marginal rate. The franking credit is a tax offset against the tax on the grossed-up dividend. If your marginal rate is above the company rate you pay the difference; if it is below, the excess credit is refunded to you. A fully franked dividend has already had company tax paid on it, so you are not taxed twice on the same profit.
How do franking credits work, with an example?
Say you receive a $70 fully franked dividend with a $30 franking credit attached. The company already paid $30 of tax at the 30% rate, so you are treated as earning $100 before tax (the grossed-up dividend). You declare the full $100, work out the tax on it at your marginal rate, then subtract the $30 credit. If your rate is 32% the tax is $32, less the $30 credit, so $2 to pay. If your rate is 0% you get the $30 back as a refund.
How does the franking credit refund work?
When your franking credits are larger than the tax owed on the grossed-up dividend, the Australian Taxation Office refunds the difference in cash. Australia is one of the few countries that pays out excess imputation credits, so low-income earners, retirees and super funds in pension phase can receive a refund even when they pay little or no tax. Companies do not get the cash refund, but can carry the excess forward as a loss.
What is the difference between fully franked and partially franked dividends?
A fully franked dividend carries a franking credit for the full company tax already paid, so the franking percentage is 100%. A partially franked dividend has had tax paid on only part of it, so the franking percentage is lower, say 50%, and the credit is smaller. An unfranked dividend carries no credit at all. Set the franking percentage in the calculator to match your dividend statement.
What is a grossed-up dividend?
The grossed-up dividend is your cash dividend plus the franking credit attached to it. It represents the company's pre-tax profit behind your dividend, and it is the amount you add to your assessable income. You then claim the franking credit as an offset against the tax on that amount. A $700 cash dividend with a $300 credit grosses up to $1,000.
This tool is a guide, not tax advice.
