Australia franking credits 2026: how a $1,000 dividend can give you a $1,429 grossed-up income

What franking credits actually are

In most countries, corporate profits get taxed twice: once at the company level, and again as dividend income at the shareholder level. Australia avoids this through its "dividend imputation" system, in place since 1987.

The mechanism:

1. An Australian company earns $100 of profit. 2. It pays $30 in company tax (30% rate, the standard for large companies). 3. The remaining $70 is available for dividends. 4. When the company pays the $70 as a dividend, it attaches a "franking credit" of $30. 5. The shareholder receives the $70 dividend AND the $30 franking credit as information on their tax return. 6. They "gross up" the dividend back to $100 (the pre-company-tax amount). 7. They pay personal income tax on the $100. 8. They subtract the $30 franking credit from their personal tax bill.

Net effect: the profit is taxed only once, at the shareholder's personal rate. If their rate is 30%, they owe $30 personal tax (offset by the $30 franking credit, so zero). If their rate is 47%, they owe $47 personal tax minus $30 franking credit = $17 net. If their rate is 0% (retiree in pension phase), they owe $0 personal tax but get the $30 credit refunded in CASH.

This last point - refundability for low-income shareholders - is the distinctive Australian feature. New Zealand has a similar imputation system but credits are not refundable. The Labor 2019 election proposal was to make franking credits non-refundable; the proposal was abandoned after the election loss.

The math: fully franked vs partly franked vs unfranked

Fully franked dividend: the company has paid full company tax on the profits behind the dividend. Franking credit = dividend × (company tax rate / (1 - company tax rate)).

For a 30% company-tax-rate company: * Franking credit = dividend × (30/70) = dividend × 0.4286 * $1,000 dividend → $428.57 franking credit * Grossed-up income = $1,000 + $428.57 = $1,428.57

For a 25% company-tax-rate company (small/base-rate entities): * Franking credit = dividend × (25/75) = dividend × 0.3333 * $1,000 dividend → $333.33 franking credit * Grossed-up income = $1,000 + $333.33 = $1,333.33

Partly franked dividend: the company has paid some company tax on the underlying profits, but not all (e.g., 60% franked). Franking credit is calculated only on the franked portion. Common with international-revenue companies (e.g., BHP earns much overseas, pays foreign tax, so some dividends are partly unfranked).

Unfranked dividend: no franking credit attached. Common for:

* REITs paying out trust distributions (which are pre-tax) * Listed Investment Companies passing through foreign income * Companies paying out non-taxed gains (rare) * Privately-held companies that have chosen not to attach credits

Shareholder result by tax bracket on a $1,000 fully franked dividend (30% franking):

* 0% bracket (pension phase): $1,428.57 grossed-up income → $0 tax → $428.57 refund + $1,000 cash dividend = $1,428.57 total income. * 15% bracket (SMSF accumulation): $1,428.57 → tax $214 → minus $429 credit = $215 refund + $1,000 dividend = $1,215 total income. * 19% bracket: $1,428.57 → $271 tax minus $429 credit = $158 refund + $1,000 = $1,158. * 30% bracket: $1,428.57 → $429 tax minus $429 credit = $0 net + $1,000 = $1,000. * 37% bracket: $1,428.57 → $529 tax minus $429 credit = $100 net tax + $1,000 dividend - $100 = $900 net. * 45% bracket: $1,428.57 → $643 tax minus $429 credit = $214 net tax + $1,000 - $214 = $786 net. * 47% bracket (top with Medicare): $1,428.57 → $671 tax minus $429 credit = $243 net tax + $1,000 - $243 = $758 net.

Who benefits most: SMSF retirees

The biggest beneficiaries of franking credits are Self-Managed Super Funds (SMSFs) in pension phase. In pension phase, the SMSF pays 0% tax on its income (up to the Transfer Balance Cap, currently $1.9 million per person from July 2024).

A pension-phase SMSF holding $1 million of Australian shares yielding 4.5% in fully franked dividends:

* Annual dividend cash: $45,000 * Franking credit: $19,286 * Total income to fund: $64,286 * Tax: $0 * Refund of franking credits to fund: $19,286 * Net cash to fund: $64,286

This is 43% more cash than the same dividend received by a top-bracket individual ($45K vs $64K).

Strategy implication: SMSFs in pension phase have historically tilted their equity exposure toward fully-franked Australian companies. CBA, NAB, ANZ, Westpac, Telstra, Wesfarmers, Woolworths, BHP (in years with full franking) are SMSF retirement favorites.

The Labor 2019 threat that did not happen: Bill Shorten's 2019 election platform proposed making franking credits non-refundable. For SMSFs in pension phase, this would have cut income by 30-40%. Labor lost the election; the proposal was permanently dropped.

The 2024 cap on franking refunds threat: Treasury floated a $20,000 annual refund cap in early 2024; the proposal was not legislated. Currently no cap.

Foreign investors miss out: a non-resident shareholder cannot claim franking credits. They typically receive only the cash dividend portion, taxed at a 30% withholding rate (or lower under a tax treaty).

Holding period and 45-day rule

To claim franking credits, you must satisfy the "holding period" rule: you must hold shares "at risk" for at least 45 days (90 days for preference shares) around the dividend payment date.

Why this rule exists: to prevent franking credit "stripping" - buying shares just before the ex-dividend date to capture the credit, then selling immediately.

Mechanics:

* Count 45 days starting the day AFTER you bought, ending the day BEFORE you sold * The day of purchase and the day of sale do not count * Days where you have offsetting positions (e.g., short selling) reduce the at-risk period

Small shareholder exemption: if your total franking credits in a year are under $5,000, the holding period rule does not apply to you. Most retail investors with diversified portfolios fall under this exemption.

Worked example:

* Buy 1,000 CBA shares on 15 February * Ex-dividend date: 20 February * Dividend pays: 1 April * You can sell on 1 April only if you intend to claim the franking credit, you must hold until at least 1 April + 1 = 2 April (45 days from 16 February)

SMSF and trust angle: SMSFs are subject to the holding period rule, but most pension-phase SMSFs are long-term holders so the rule is not a practical constraint.

Buying franking-rich vs growth shares: the trade-off

High-franking shares (CBA, NAB, Westpac, Wesfarmers, etc.) typically have:

* High dividend yield (4-6%) * Lower growth (mature business) * High franking credit attached (most dividends fully franked)

Growth shares (technology, mining-exploration, biotech) typically have:

* Low or zero dividend yield (often no dividend at all) * Higher capital growth potential * No franking credits to refund

For an SMSF in pension phase: the franking refund is worth roughly 1.4% of portfolio value annually on a 4.5%-yield fully franked portfolio. This is a real return tilt toward franking-rich holdings.

For an individual in the top tax bracket (47%): a fully franked 4.5% dividend yields about 3.4% after tax (the franking credit covers most of the personal tax). An unfranked 4.5% dividend yields about 2.4% after tax. So franking is worth 1 percentage point of after-tax yield.

For an individual in the 30% bracket: a fully franked 4.5% dividend yields the full 4.5% after tax (franking credit exactly offsets personal tax). An unfranked dividend yields 3.15%. Franking is worth 1.35 percentage points.

Buy ETF allocation strategy:

* SMSF pension phase: tilt toward AU equity ETFs (VAS, A200) for franking * SMSF accumulation phase: balance between AU and global (VEU, VTS) * Personal taxable account: depends on marginal rate; mid-bracket benefits least from franking tilt

Counterpoint: the Australian Securities Exchange is concentrated in a few sectors (banks, miners, REITs). Over-tilting for franking concentrates sector risk. Most financial planners recommend franking ETFs as a slice of the portfolio, not the whole thing.