Franked Dividends Guide
The smartest tax advantages are often the ones investors mistake for ordinary income.
What are franked dividends?
Franked dividends are distributions from Australian companies that come with a franking credit, reflecting tax paid by the company before profit is shared with shareholders. Investors receive both the cash dividend and a franking credit to avoid double taxation under Australia’s dividend imputation system.
Franked dividends do not make tax disappear. They change where the tax is recognised and can materially improve an investor’s after-tax return.
Why franked dividends matter
Franked dividends can be a powerful tool for retirees, self-managed super funds (SMSFs) and long-term income investors seeking tax-efficient returns. The real benefit is the grossed-up dividend once the franking credit is included.
Example of gross-up
| Item | Amount | Meaning |
|---|---|---|
| Cash dividend | $700 | Paid to investor |
| Franking credit | $300 | Tax paid by company |
| Gross-up total | $1,000 | Amount assessed for tax |
How franking credits work
With a standard corporate tax rate of 30%, you can estimate a fully franked dividend:
Franking credit = (Cash dividend ÷ 70) × 30
So a $70 cash dividend carries a $30 credit, for a grossed-up total of $100.
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Tax outcomes by investor rate
| Tax rate | Tax on $1,000 | Less $300 credit |
|---|---|---|
| 0% | $0 | Refund $300 |
| 19% | $190 | Refund $110 |
| 30% | $300 | No extra tax |
| 37% | $370 | Pay $70 |
Franking levels
- Fully franked: Maximum credit attached.
- Partly franked: Partial credit attached.
- Unfranked: No credit attached.
Comparing two dividend shares
| Share | Cash dividend | Franking status |
|---|---|---|
| Share A | $5,000 | Fully franked |
| Share B | $5,000 | Unfranked |
At 30% company tax, Share A’s franking credit is about $2,143, grossing up to $7,143. A low-tax investor keeps more after tax than with Share B, even though the cash amounts match.
Who benefits most?
- Retirees: Potential refunds on credits.
- SMSFs in pension phase: Enhanced income via refunds.
- Long-term equity investors: Tax-efficient yield.
- DRP participants: Credits still apply for tax.
Key considerations
- Yield vs sustainability: High yield can signal earnings stress.
- Market risk: Dividends don’t protect share price.
- Holding rules: Minimum periods to claim credits.
- Variable tax rates: Some firms pay lower rates.
- International shares: No Australian franking credits.
Practical example
An investor with 2,000 shares at $1.20 fully franked receives $2,400 cash plus $1,029 credit, grossing up $3,429. If their tax rate is below 30%, the credit reduces or refunds personal tax.
Building a strategy
Integrate franked dividends in a diversified portfolio. Evaluate:
- Company quality and balance-sheet strength
- Payout ratio and earnings growth
- Sector diversification
- Total return, not just yield
- Your personal tax position
Key takeaway: Fully franked dividends boost after-tax returns when attached to strong businesses bought at reasonable valuations.
Final thoughts
Franked dividends are one of Australia’s most distinctive tax advantages. Their real value lies in the after-tax benefit—particularly for low-tax investors and retirees.
