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Dividend Imputation Explained: How Franking Credits Work

Investor reviewing a dividend statement at home

Dividend imputation is the Australian system that stops company profits being taxed twice. A company pays tax on its profit, then attaches a franking credit to the dividend it pays you. You count the dividend and the credit as income, then use the credit to offset your own tax. If your tax bill is smaller than the credit, the ATO refunds the difference to you as cash if you are an eligible resident individual.

This guide walks through the mechanics with a worked example, covers the rules that can stop you claiming, and explains why franking matters so much for retirees. It also covers a question that often comes up alongside it: how annuity income is taxed.

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TL;DR

  • Franking credits represent tax the company has already paid. Resident shareholders can use them as an offset against tax payable on dividends.
  • You declare the cash dividend plus the franking credit as income, then receive an offset equal to the credit. Any excess is refunded after your income tax and Medicare levy are covered.
  • The 45-day holding rule, related payments and dividend washing can block a claim. The small shareholder exemption removes the holding rule if your total credits are under $5,000.
  • Non-super annuities are taxed differently: part of each payment is a tax-exempt return of your purchase price, and the rest is assessable.
  • A model that tracks franking alongside super, shares and property shows what your after-tax income really looks like.

Table of Contents

What dividend imputation actually does

Without imputation, a company would pay tax on its profit and then you would pay tax again on the dividend. The same dollar of profit would be taxed twice.

Australia’s answer is to treat company tax as a pre-payment of your tax. The Parliamentary Budget Office describes it as similar to PAYG withholding on wages: your employer withholds tax before you get paid, and you settle the real amount at tax time. In the same way, the company withholds tax on your behalf before profits reach you. The ATO says the system lets corporate entities pass on credits for tax already paid on distributed profits, which prevents double taxation.

The credit is also called an imputation credit because the tax paid is “imputed” to you, the shareholder. When people search for franking credits or the imputation system, they are asking about the same thing.

The system applies to Australian resident companies. New Zealand companies can also choose to join it, and the ATO notes that they may pay franking credits to their shareholders.

What dividend imputation actually does — overview diagram

A worked example with real numbers

Take a company that earns $100 of profit and pays 30% company tax. That leaves $70 to distribute.

  1. The company pays $30 in tax.
  2. It pays you a $70 fully franked dividend, with a $30 franking credit attached.
  3. You declare $100 of income: the $70 dividend plus the $30 credit.
  4. You work out your tax on that $100 at your own marginal rate, then subtract the $30 credit.

The credit for a fully franked dividend is the dividend multiplied by 30/70 when the company tax rate is 30%. Smaller companies may pay a lower rate, so the fraction differs. Your dividend statement shows the actual credit, so you do not need to calculate it yourself.

Here is how that $100 plays out for three hypothetical investors, using round illustrative tax rates (not your actual rates):

Your marginal rate Tax on $100 Less franking credit Result
0% (no tax payable) $0 $30 $30 refunded
30% $30 $30 $0 extra tax, $0 refund
45% $45 $30 $15 extra tax to pay

The pattern is the point. If your rate is below the company rate, the credit more than covers your tax and you get money back. If it is higher, you top up the difference. Imputation effectively taxes company profits at the shareholder’s own rate.

The ATO explains that tax is payable at the applicable rate on the dividend and the attached credit, and any excess offset is refunded to eligible resident individuals after their income tax and Medicare levy liabilities are met.

Fully franked, partly franked and unfranked

Not every dividend carries the full credit. Companies choose how much to frank, and the label on your statement tells you what you received.

  • Fully franked: the credit matches the company tax paid on the profit being distributed.
  • Partly franked: only a portion of the dividend carries a credit.
  • Unfranked: no credit. The dividend is simply assessable income.

The ATO notes that companies have flexibility in allocating credits, but they must follow benchmark rules requiring consistent franking of distributions within a franking period. That is why a company’s franking level tends to stay steady from one dividend to the next.

A company can only frank a dividend if it has paid Australian tax. A business that earns most of its profit overseas, or has carried-forward losses, may have little to attach. When comparing shares or funds, check the franking percentage, not just the headline yield.

How to claim franking credits

The mechanics at tax time are simple, though the details trip people up.

To claim, you must include both the dividend and the franking credit in your assessable income. The offset is then applied against your tax. Most of this is pre-filled in myTax from information your share registry and brokers report to the ATO, but you should check it against your dividend statements.

If you want a step-by-step on getting refunds as a retiree, our guide to claiming franking credits covers the process in detail.

The rules that can stop you claiming

Imputation is generous, so there are anti-avoidance rules. You may not be entitled to the credit if:

  • you sell the shares within 45 days of buying them (90 days for certain preference shares),
  • you make a related payment, such as passing the benefit on to someone else, or
  • you receive the dividend through dividend washing.

The ATO sets these out in its myTax dividends instructions. The practical lesson: if you trade in and out of shares around dividend dates, check the holding period before you assume the credit is yours.

The small shareholder exemption

Most everyday investors never face the holding period rule. The ATO’s small shareholder exemption lets individuals whose total franking credit entitlements are below $5,000 claim the offset without meeting the holding period rule. Check the current ATO page for the threshold and conditions that apply to your return year.

Why franking matters so much for retirees

When your tax rate is low, franking credits stop being a minor offset and become part of your income. A retiree with modest taxable income and a portfolio of franked shares may receive a refund, which effectively lifts the yield on those shares above the cash dividend.

That has shaped retirement planning for decades. The idea of removing cash refunds became a major political fight in 2019, which is a good reminder that tax settings can change. We would not build a plan that depends on today’s rules lasting forever without testing what happens if they shift.

Franking also interacts with other parts of your plan:

  • Super in pension phase: a fund paying no tax on pension earnings can use credits to reduce or offset tax in the fund, as covered by the ATO. Confirm the specifics with your fund or a licensed adviser.
  • Age Pension: franked dividends are part of your assessable income for the income test, and shares count toward the assets test.
  • Capital gains: a share that pays a high franked dividend and one that grows in price can leave you with very different after-tax outcomes. Gains come with their own rules, which we cover in our guide to capital gains tax on shares.

If you want to see how far a dividend-focused portfolio could stretch, this walk-through of living on franked dividends puts numbers on it. For how investment income is taxed in retirement more broadly, see our piece on tax on investment income for retirees.

Franked dividends versus capital gains

People often ask which is better. The honest answer is that it depends on your tax rate, your timeline and your risk tolerance.

Franked dividends Capital gains
When taxed Each year you receive them When you sell (realized)
Credit for company tax Yes, via franking No credit
Control over timing Low, the company decides High, you choose when to sell
Cash flow Regular income Only when you sell

Franked dividends give you income now and an offset against tax. Capital gains give you control over when tax is triggered, which can matter a lot if you plan to retire early and have years of low income. Neither is automatically superior. Choose by modelling your own numbers, not by rule of thumb.

Perspective: why we model franking, not just estimate it

We built Aerowealth because most retirement tools treat investment income as a single number. Franking breaks that. Two portfolios with the same pre-tax yield can leave you with different after-tax income depending on franking levels, your marginal rate in each year and whether you are in the accumulation or pension phase.

That is why we think franking belongs inside the whole plan, next to super, property, mortgages and the years before you can access super. A refund that looks small in one year can compound across a long retirement, and a change in your income in one year can swing the refund from positive to negative. Seeing scenarios side by side, with stress tests on the assumptions, is a clearer way to judge this than a spreadsheet with a hard-coded tax rate.

— Aerowealth Team

How annuity income is taxed in Australia

Annuities are a separate topic from imputation, but readers who ask about franking income in retirement often ask about them next. The treatment depends on what money bought the annuity.

Annuities bought with non-super money

For a non-super annuity, part of each payment is treated as a return of your own money. The ATO’s tax table says the deductible amount is exempt from tax, and withholding is calculated on payments less that amount.

The deductible amount comes from the undeducted purchase price, less any residual capital value, divided by the annuity term or life expectancy factor. So the longer the expected payment period, the smaller the tax-free slice each year. This applies to both lifetime and fixed-term annuities, and to immediate annuities that begin paying straight away.

For example, a purchase price of $100,000 with no residual value and a 20-year term gives a deductible amount of $5,000 a year. If the annuity pays $7,000, then $2,000 is assessable. Those figures are illustrative only.

For eligible resident investors in the AGILE arrangement, the ATO’s ruling says payments between 19 January 2026 and 30 June 2028 are assessable to the extent they exceed the deductible amount.

Annuities bought with non-super money — overview diagram

Annuities from super

Payments from super-fund rollovers or super income streams are withheld under a different schedule. The ATO tells payers to use Schedule 6 for annuities bought with non-super money and Schedule 13 for payments from super-fund rollovers or super income streams. The tax outcome also depends on your age and the components of your super balance, so confirm with your fund or a registered tax agent.

One related point: if your super includes a defined benefit scheme, there is a separate cap to watch, covered in our guide to defined benefit pension tax.

Annuities and the Age Pension

Tax is only half the picture. Services Australia says that for the income test, 60% of gross payments from a lifetime income stream is assessed as income once payments commence. For lifetime income streams bought on or after 1 July 2019, the assets test treatment depends on whether you used super or savings, and involves a Capital Access Schedule.

This is where a modelling tool earns its keep. Buying an annuity changes your taxable income, your assessable income and your assets at once.

Putting it together in your own plan

Imputation is easy to understand and hard to estimate for your own situation, because the answer changes with your income each year. A few habits help:

  1. Keep every dividend statement, or check the pre-filled figures in myTax each year.
  2. Note the franking percentage of each holding, not only the dividend yield.
  3. Check the 45-day rule before trading around dividend dates, unless you are under the small shareholder threshold.
  4. Model low-income years separately. Early retirement years before you can access super are when franking refunds are largest.
  5. Stress test the plan against a change in franking rules or company payout levels.

If you hold shares in an investment structure or want to see how an offset account fits alongside your portfolio, our guides on offset accounts for investment property and offset versus savings accounts show how those choices interact with your tax.

Model franking inside your retirement plan

Aerowealth lets you project super, shares and ETFs, investment property and mortgages in one plan, with tax and CGT impacts and side-by-side scenarios. The Free plan is a good place to start, and Pro is $7 per month if you want expanded scenario planning, bridge mode for the years before super preservation age, and more AI assistant quota. See the plans on our pricing page.

FAQ

What is dividend imputation in simple terms?

It is the system that makes sure company profit is taxed once, at your rate. The company pays tax and attaches a franking credit to your dividend. You use that credit to offset your own tax, and if you owe less than the credit, you may receive a refund.

Who can get a refund of franking credits?

Eligible resident individuals can receive a refund when the credits exceed their tax. The ATO applies the offset after your income tax and Medicare levy liabilities are met, and refunds the excess. Check the ATO’s page on refunds of franking credits for your own circumstances.

Can I lose my franking credits?

Yes. You may not be entitled if you sell shares within 45 days of buying them, make a related payment or receive a dividend through dividend washing. Individuals with total credits under $5,000 can use the small shareholder exemption and skip the holding period rule.

How is a lifetime annuity taxed in Australia?

For a non-super annuity, the deductible amount is tax-exempt and the rest of each payment is assessable. The deductible amount comes from your purchase price, less any residual capital value, divided by the term or life expectancy factor. Annuities paid from super follow different withholding rules, so confirm with your fund or a registered tax agent.

Sources

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