Franking credits, also known as imputation credits, are a unique feature of the Australian tax system designed to prevent double taxation of company profits when distributed as dividends to shareholders. Originally published at https://taxly.ai/tax-returns/what-is-a-franking-credit-and-how-does-it-impact-your-tax-return/#Types_of_Franking_Credits_in_Australia

1. What is a Franking Credit and
How Does it Impact Your Tax
Return?
Franking credits, also known as imputation
credits, are a unique feature of the Australian tax
system designed to prevent double taxation of
company profits when distributed as dividends to
shareholders.
Safe & Secure
www.taxly.a
i

2. Key Takeaways
● The tax benefits of franking credits make them
particularly attractive to shareholders,
especially those in lower tax brackets or
retirees.
● Franking credits align dividend income with an
individual’s personal tax rate, preventing
double taxation.
● Fully franked dividends provide the maximum
tax benefit, but partially franked dividends can
still be advantageous.
● The refundable nature of franking credits
makes them valuable to individuals with lower
overall incomes, including self-funded retirees.
www.taxly.a
i

3. How Franking Credits Work:
1. Corporate Taxation: When an Australian company
generates profits, it is required to pay corporate
income tax on those earnings at the prevailing
corporate tax rate. As of my last knowledge update in
September 2021, this rate was 30%.
2. Dividend Distribution: After paying corporate taxes,
the remaining profits can be distributed to
shareholders as dividends. These dividends may
come with an attached “franking credit,” which
represents the amount of tax the company has
already paid on those profits.
3. Tax Offset: Shareholders who receive dividends with
franking credits can use these credits as a tax offset
when they report their income on their individual tax
returns.
www.taxly.a
i

4. Tax Impact:
Now, when you file your individual tax
return, you will declare the entire $1 (70
cents dividend plus 30 cents franking
credit) as part of your income. If your
personal marginal tax rate is lower than
the corporate tax rate (30%), you will be
entitled to a refund for the excess franking
credits. In this scenario, franking credits
effectively reduce your tax liability or
provide you with a cash refund.
www.taxly.a
i

5. Why Franking Credits Matter:
● Tax Fairness: Franking credits help ensure that
shareholders are not taxed twice on the same
company profits, which would be unfair and
discourage investment.
● Appeal to Retirees: Franking credits are
particularly popular among retirees because they
can provide valuable tax refunds, especially for
those with lower overall income.
● Impact on Government Revenue: Critics argue
that franking credits reduce the amount of tax
revenue collected by the government, potentially
affecting public services. However, supporters
believe they are essential for supporting retirees.
www.taxly.a
i

6. Types of Franking Credits in
Australia
In the context of Australian franking credits, there
are primarily two types: fully franked dividends and
partially franked dividends. Let’s explore these
types with clear explanations and examples:
1. Fully Franked Dividends:
Fully franked dividends are dividends that come
with franking credits representing the entire amount
of tax that the company has already paid on its
profits. These are the most tax-efficient dividends
for shareholders.
www.taxly.a
i

7. 2. Partially Franked Dividends:
Partially franked dividends, on the other hand, are
dividends where the company attaches franking credits
representing only a portion of the tax paid on its profits.
These dividends indicate whether the company paid
taxes on the entire amount of profits distributed as
dividends.
Example: Imagine Company B generates a profit of $1
per share before taxes. However, it only attaches 20
cents in franking credits to each dollar of dividends it
distributes. This means the company has paid taxes on
only 20 cents of the profit per share. Shareholders
receiving partially franked dividends can still use the
attached franking credits, but they may not cover the full
amount of tax owed on the dividends [Source].
www.taxly.a
i

8. The Bottomline
The franking credits in Australia offer significant tax
benefits which can have a positive impact on the
tax liability and investment returns of shareholders.
The distribution of these benefits reflects the
diverse nature of the Australian share market and
the importance of franking credits in optimizing
investment returns and supporting retirees.
www.taxly.a
i

9. Why Trust on A.I?
From Humble Beginnings to Global Impact
Download icons from:
https://www.flaticon.com/authors/super-basic-orbit/outline?author_id=1&type=standard
Data Security Tax Filing Statements
www.taxly.a
i