Franking Credits Explained (The Refund Hiding in Your Dividends)

Two people each buy $10,000 of the same Australian bank shares. The share price moves identically for both of them, and the dividend paid per share is identical too. Yet what actually lands in each person's pocket after tax can be meaningfully different. The difference isn't the shares — it's franking credits.

What a Franking Credit Actually Is

Australia runs a dividend imputation system. When an Australian company pays tax on its profits (at the 25% or 30% corporate rate, depending on the company), it can attach a credit for that already-paid tax to the dividends it distributes to shareholders. The idea is simple: company profits shouldn't be taxed twice — once inside the company, and again in the shareholder's hands — so the credit "imputes" the company-level tax as if the shareholder had already paid it themselves.

How It Actually Hits Your Tax Return

A franked dividend is reported on your tax return "grossed up" — the cash dividend plus the attached franking credit — which adds to your assessable income. The franking credit is then subtracted from your total tax payable. If your personal marginal tax rate is below the corporate rate the company already paid, you come out ahead. If it's above, the credit simply reduces what you owe rather than eliminating it.

The Refund Nobody Talks About

For Australian tax residents whose total tax liability for the year is lower than their franking credit entitlement — common for lower-income earners, retirees, or anyone with a chunk of income taxed favourably elsewhere — the ATO pays out the excess as an actual cash refund, not just a reduction in tax owed. This remains fully intact as of 2026: a 2019 federal proposal to abolish cash refunds for excess franking credits was never legislated and isn't current policy, but it's worth knowing the mechanic has been a live political question before and could be again.

What It Means for Choosing Between ETFs

Australian equity ETFs (for example, those tracking the ASX 200) pass franking credits through to unit holders, because the underlying companies are Australian taxpayers generating them. International ETFs generally carry no Australian franking credits at all, since the companies inside them aren't paying Australian company tax.

Neither option is automatically better — it's a genuine trade-off between the tax efficiency of franking credits and the diversification benefit of exposure outside the Australian market (which, on its own, represents a small fraction of global equities). The point isn't to chase franking credits at the expense of diversification, or to ignore them entirely — it's to be deliberate about the Australian-versus-international split in a portfolio rather than landing on it by accident.

Interactive: Franking Credit & After-Tax Yield Calculator

Enter a share or ETF's dividend yield, its franking percentage, and your marginal tax rate to see the grossed-up dividend, the value of the attached credit, and your true after-tax (or refunded) return — shown side by side against an equivalent unfranked or international holding.

General Advice Warning: The information provided here is for general educational purposes only. It does not take into account your personal financial objectives, situation, or needs. Tax treatment depends on individual circumstances and is subject to change. Please consider speaking with a licensed financial adviser or registered tax agent before acting.

Next Steps: Franking credits are one factor in the Australian-versus-international split covered in Block 12 (ETFs and Index Funds vs. Individual Shares) — worth reading the two together before settling on a portfolio mix.