Franking credits net effect.
Net after tax + credit
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Grossed-up dividend
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Franking credit
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Net tax (or refund)
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Why a dividend cheque is bigger than it looks
Australia runs a dividend imputation system, which is rarer than most investors realise. The idea is that company profits should not be taxed twice, once in the company's hands and again in yours. When an Australian company pays tax at 30 percent on its profits and then distributes what is left as a fully franked dividend, it attaches a franking credit representing the tax already paid. You declare the grossed-up dividend, meaning the cash plus the credit, as income, then use the credit to reduce your own tax bill. Done properly, you are only ever taxed on the gap between the company rate and your personal rate.
This tool reverses the cash dividend you actually received back into its pre-tax form. It adds the franking credit using the 30/70 gross-up, applies your marginal rate to the grossed-up figure, then subtracts the credit. The result can be a small top-up of tax, or a refund landing in your account, depending on where you sit.
A $7,000 dividend at the 32 percent rate
Say you received $7,000 in fully franked dividends and your marginal rate, including the Medicare levy, is around 32 percent. The company has already paid $3,000 of tax on the underlying profit, and that becomes your franking credit.
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So on a $7,000 dividend, a 32 percent earner pays just $200 of additional tax, because the company already covered the bulk of it. Now change the marginal rate to zero, the position of a retiree in pension phase, and the maths flips: the full $3,000 credit becomes a cash refund, turning the $7,000 dividend into $10,000 in hand. The chart traces the net result across three taxpayer types.
The refundable credit that makes Australia unusual
Most countries that offer imputation only let you reduce your tax to zero with the credit and then stop. Australia goes further: if your franking credits exceed your total tax, the ATO refunds the excess in cash. This is why fully franked shares are a cornerstone of so many self-funded retiree and low-income portfolios. A retiree whose superannuation pension income is taxed at zero collects the entire 30 percent corporate tax back as a refund. That single feature can lift the effective yield on a franked share by more than 40 percent compared with the cash dividend alone.
A judgement call worth making: chasing franking credits is not the same as chasing returns. A common mistake is loading a portfolio with high-yielding franked bank and miner shares purely for the refund, while ignoring concentration risk and total return. The credit is a bonus on top of a sound investment, not a reason to abandon diversification. Note too that the 45-day holding rule can deny the credit if you buy a share just before the ex-dividend date and sell straight after.
Who gets the most value here
This calculator speaks loudest to two audiences. Self-funded retirees and low-income earners, who turn franking credits into real cash refunds, will see the most dramatic numbers. High earners on the top 45 percent rate still benefit, but for them the credit only softens the tax rather than eliminating it, since their personal rate sits well above the 30 percent company rate. Set your marginal rate honestly, remembering to include the 2 percent Medicare levy, and the tool will show whether a given parcel of franked dividends generates a top-up or a windfall.
What is the difference between fully franked and partially franked?
A fully franked dividend carries the maximum credit, reflecting company tax paid at the full 30 percent on every dollar distributed. A partially franked dividend attaches a smaller credit because only part of the profit was taxed in Australia, often the case for companies with significant overseas earnings. This tool assumes full franking, so for a partially franked payout your actual credit, and therefore your net benefit, will be smaller.
Do I need to do anything special to claim the credits?
Not really. Your dividend statements report the franking credits, and they flow through to your tax return where they are automatically offset against your tax or refunded. For most individuals it is handled when you lodge. Retirees whose only issue is a refund of excess credits can use a simplified ATO application if they have no other reason to lodge a full return.
Are franking credits taxed when I receive them?
The credit is included in your assessable income as part of the grossed-up dividend, so in that sense it is taxed, but then handed straight back to you as an offset. The net effect is that you pay tax only on the difference between your marginal rate and the 30 percent already paid by the company. If your rate is below 30 percent, the difference is negative and becomes a refund rather than a charge.