Franking Credits

The Basics of Franking Credits

Understand the basics, follow the examples and try the online calculator.

10 Second Summary


Franking credits represent the tax a company has already paid on any profit it distributes to shareholders as a dividend.

The credits reduce a shareholder's tax liability at the end of the financial year and can result in an ATO refund.

Quick Links:   Franking Credit Formula  |  Online Calculator

What are Franking Credits?

Companies in Australia must pay a flat 30% tax on all profits. However, a company is not obliged to pay tax on any profit it distributes to shareholders as a dividend. Therefore, when investors receive their dividend payment it can be fully franked, partially franked or unfranked.

Fully franked - 30% tax has already been paid before the investor receives the dividend.
Partly franked - 30% tax has already been paid on PART of the dividend.
Unfranked - No tax has been paid.

The franking amount is displayed as a percentage; a partly franked 75% dividend means that the company has already paid tax on 75% of the dividend at a 30% tax rate, but not on the remaining 25%.

As shareholders all have different marginal tax rates, franking credits are used to determine how much tax the shareholder must pay (if any) at the end of the financial year on the dividend.

Why do they exist?

Franking credits prevent “double dipping” by the government where tax is paid on profits by both the company and the investor.

Before 1987, profits made by a company were taxed at the company level before being passed to shareholders as a dividend. A shareholder would receive the dividend and then pay tax again at his/her marginal tax rate.

This “double dipping” stopped in 1987 with the introduction of the Imputation System.

Under the new system, dividends come with franking credits (i.e. imputation credits) attached which represent the tax already paid by a company. If an investor is eligible to use franking credits then their tax liability is reduced at the end of the financial year. Having excess franking credits may even lead to a refund if the investor's marginal tax rate is below the 30% company tax rate.

How Franking Credits Work

Let’s use an example of BHP paying a 100% fully franked dividend.

1. BHP makes a profit of $2.1428 per share and decides to distribute it all to shareholders.

2. BHP first pays the 30% company tax totalling $0.6428 per share (2.1428 * 0.3), then distributes the remaining $1.50 as a fully franked dividend.

3. The $0.6428 tax paid becomes the franking credit.

At Company Level
Gross Profit $2.1428
Taxable Profit $0.6428
Net Profit $1.50

If you hold 4,500 shares in BHP, you’ll receive a dividend of $6,750 (4,500 shares x $1.50 dividend) plus franking credits that represent the tax already paid.

1 Share
Dividend per share (DPS) $2.1428
Franking Credit $0.6428
Gross DPS $1.50
4,500 Shares
Dividends Paid $2.1428
Total Franking Credits $0.6428
Total Gross Dividends $1.50

Case Study 1 - Fully Franked

- BHP pays a fully franked dividend of $1.50 per share.
- On 4,500 shares this equates to $6,750 dividends paid with $2,892 of attached franking credits.

Investor 1 Investor 2 Investor 3
Dividends Paid $6,750 $6,750 $6,750
Franking Credits $2,892 $2,892 $2,892
Taxable Income (DPS + FC) $9,642 $9,642 $9,642
Marginal Tax Rate 15% 30% 45%
Gross Tax Payable $1,446 $2,892 $4,338
Tax Payable (Refund) ($1,446) $0 $1,446



What about partly franked?
You will receive more in dividends paid and a smaller franking credit. All other calculations are the same.

Case Study 2 - Partially Franked

- BHP makes a profit of $2.1428 per share and decides to distribute it all to shareholders as a 25% partially franked dividend of $1.9355 per share.
- On 4,500 shares, this equates to $8,709 dividends paid with $933 of attached franking credits.

Investor 1 Investor 2 Investor 3
Dividends Paid $8,709 $8,709 $8,709
Franking Credits $933 $933 $933
Taxable Income (DPS + FC) $9,642 $9,642 $9,642
Marginal Tax Rate 15% 30% 45%
Gross Tax Payable $1,446 $2,892 $4,338
Tax Payable (Refund) $513 $1,959 $3,405


 

Franking Credits Formula

Franking credits are calculated using the formula:

dividend amount * company tax rate / (1 - company tax rate) * franking proportion

As Australia's company tax is a flat 30% the calculation is always:

dividend amount * 0.30 / 0.70 * franking proportion

Example:

BHP pays a 60% partially franked dividend of $1.30 per share.

1.30 * 0.30 / 0.70 * 0.60 = 0.3342 franking credits per share

Franking Credit Calculator

Dividend Amount:

Franking %:

Shares held:


Franking credit

Gross dividend (c)


Total dividends paid ($)

Total franking credits ($)

Total gross dividend ($)




Which is better - Fully, partly or unfranked dividends?

In general, receiving your dividends fully franked, partly franked or unfranked makes little difference. The amount of tax you pay and the amount of money that ends up in your pocket will be the same. But it might change your investment strategy, for example:

1) If you purchase shares via a company or trust structure, you must hold your shares for a minimum of 45 days in order to use franking credits.

2) If you’re marginal tax rate is above 30%, you might choose to buy shares in an entity (or person) that pays less than 30% tax in order to get the benefit of franking credits.

3) Active investors' may prefer unfranked dividends as they can use the extra funds in other investments before the ATO takes its cut.

 

The 45 Day Holding Rule

To be eligible for the franking tax offset you must continuously hold your shares “at risk" for details for a minimum of 45 calendar days (or 90 days for certain preference shares). The shares must be:

1) Purchased BEFORE the ex-dividend date
2) In your possession ON the ex-dividend date (although you can sell them on the ex-dividend date)

Rule 1: Purchase and Sale Date
The purchase date and sale date are NOT included in the count, so it’s effectively 47 days.

Rule 2: Small Shareholder Exemption
The 45 day rule does not apply if the investor is an individual taxpayer AND the total franking credits being claimed are below $5,000 for the financial year.

Rule 3: Last-in First-out Rule (LIFO)
If an investor has bought or sold shares in a company during the 45 day qualification period then the LIFO rule is applied. This is where the most recent purchase is used to determine eligibility for franking credits.

For example:

Day 1 Buy 5,000 CBA shares
Day 200 Buy 1,000 CBA shares
Day 205 CBA goes ex-dividend
Day 210 Sell 1,000 CBA shares

According to the LIFO rule, the 1,000 shares sold on day 210 are assumed to be from the most recent purchase on day 200, not day 1. Those 1,000 will not be eligible for franking credits.

Resources

ATO’s Imputation Guide - Further details on all aspects of the imputation system.