Tax & ATO
Dividend imputation
A franking credit is a tax credit attached to an Australian company dividend that represents company tax already paid on the profit being distributed. Shareholders add the credit to their assessable income, then offset it against their own tax, with any surplus refunded, so company profits are not taxed twice.
Australia uses a dividend imputation system. When a company pays tax on its profits, that tax is recorded in a franking account. When the company later pays those profits out as a dividend, it can attach franking credits equal to the tax already paid. A base rate entity (aggregated turnover under $50 million with no more than 80 per cent passive income) pays company tax at 25 per cent for 2025-26; other companies pay 30 per cent.
The shareholder then does a gross-up and offset. Suppose a company taxed at 25 per cent pays a $7,500 fully franked dividend. The attached franking credit is $2,500 (the dividend multiplied by 25/75). The shareholder declares $10,000 of assessable income (dividend plus credit), calculates tax at their marginal rate, then subtracts the $2,500 credit. If the credit exceeds their tax, resident individuals and complying super funds receive the difference as a refund. The maximum franking rate is tied to the company's corporate tax rate for imputation purposes, so a 25 per cent taxpayer cannot frank at 30 per cent. See the ATO guidance on dividends and franking credits for the formal rules.
If you run your business through a Pty Ltd company, franking credits are central to how you pay yourself. Profits left in the company are taxed once at 25 or 30 per cent. When you draw them out as franked dividends, you only top up the difference between the company rate and your personal marginal rate (16, 30, 37 or 45 per cent for 2025-26, plus the 2 per cent Medicare levy). In a year when your other income is low, a franked dividend can even generate a refund of company tax already paid.
Two traps deserve attention. First, taking money out of the company informally, rather than as wages or a properly declared dividend, can trigger Division 7A and produce a deemed unfranked dividend, taxed in your hands with no credit attached. Second, a company cannot attach more credits than its franking account holds: over-franking creates franking deficit tax. Keeping the franking account reconciled in your bookkeeping, alongside the company tax paid through PAYG instalments, means you know exactly how much franked dividend the company can afford to declare at year end.
The table below shows how the same $7,500 fully franked dividend (with a $2,500 franking credit from a 25 per cent company) lands for shareholders on different marginal rates in 2025-26. Assessable income is $10,000 in every case.
| Shareholder's marginal rate | Tax on $10,000 | Less franking credit | Net result |
|---|---|---|---|
| 0% (for example a retiree below the tax-free threshold) | $0 | $2,500 | $2,500 refund |
| 32% (30% bracket plus Medicare levy) | $3,200 | $2,500 | $700 payable |
| 47% (top bracket plus Medicare levy) | $4,700 | $2,500 | $2,200 payable |
The pattern is the point of imputation: total tax on the underlying $10,000 of company profit always ends up at the shareholder's own rate, no more and no less. Estimate the personal tax side with the OneBookPlus income tax calculator.
The 45-day holding period rule requires you to hold shares at risk for at least 45 days (90 for certain preference shares) around the dividend date to claim the credits. There is a small shareholder exemption: individuals whose total franking credits for the year are $5,000 or less do not need to meet the holding period. The rule targets dividend washing and quick trades around ex-dividend dates, not ordinary long-term holders.
Refundability depends on who receives the credit. Resident individuals and complying superannuation funds can have excess credits refunded in cash. Companies cannot get a refund, but excess credits convert to tax losses, and credits received also top up the recipient company's own franking account. Trusts pass credits through to beneficiaries in proportion to their share of trust income, subject to the same holding rules. Keep every distribution statement: it records the dividend, the franking percentage and the credit, and is what substantiates the claim in your return, as set out in the ATO's dividend guidance on ato.gov.au.
The definitions above only get you so far; the free OneBookPlus income tax calculator turns them into your own figures in seconds, no sign-up needed.
Yes, for Australian resident individuals and complying super funds. If your franking credits exceed the tax you owe, the ATO refunds the difference in cash. Companies cannot receive a refund; their excess credits convert into carry-forward tax losses instead.
A fully franked dividend carries credits for company tax paid on the entire distribution. A partly franked dividend (say 50 per cent franked) has credits attached to only part of it, usually because the company had insufficient franking account balance or paid tax at concessional rates on some profits. The unfranked portion is simply taxed at your marginal rate with no offset.
No. The maximum franking rate matches the corporate tax rate for imputation purposes, worked out from the company's prior-year turnover and passive income. A base rate entity paying 25 per cent tax franks at 25/75 of the dividend, not 30/70.
Last reviewed and updated: by Bishal Shrestha