Ever wondered why some investors seem to earn more from dividends, even when they hold the same shares?
It is not always about choosing better companies. In many cases, the difference comes down to understanding how tax works in your favour. One often overlooked feature of dividend income is franking credits, which can help improve after-tax returns. This may be especially useful if you are investing through an SMSF, planning for retirement, or focused on building a long-term share portfolio.
In this guide, Unconditional Finance explains what franking credits are, how they work, and why they may play a meaningful role in your financial strategy. We will explore who may be eligible to claim them, how to make the most of them at tax time, and how they could fit into your broader approach to investing, borrowing, and planning for the future.
Let’s make franking credits easier to understand and explore how this tax feature might support your investment outcomes.
What Are Franking Credits?
Franking credits (or imputation credits) are a type of tax credit linked to dividends you receive from Australian companies. They represent the tax the company has already paid on its profits before sharing those profits with shareholders.
This system exists to help prevent double taxation. The company pays tax on its earnings, and when it passes those earnings to you as dividends, you get a credit for the tax already paid. That credit is called a franking credit.
For example:
If a company makes a profit and pays 30 per cent tax to the Australian Taxation Office, it can then pay the remaining profit to its shareholders as dividends. When you receive that dividend, you also receive a franking credit showing how much tax the company has already paid on your behalf.
When you complete your tax return, both the dividend and the franking credit are included in your assessable income. The franking credit is then treated as tax that has already been paid for you. This can reduce the amount of tax you are required to pay and, in some cases, may result in a refund.
Who Can Claim Franking Credits?
Franking credits are not limited to wealthy or experienced investors. Many individuals, funds, and organisations may be eligible, depending on how dividends are received and their overall tax position.
You may be able to claim franking credits if you are:
✅ An Australian resident individual receiving franked dividends
✅ A retiree or low-income earner (with little or no tax liability)
✅ A Self-Managed Super Fund (SMSF), particularly in pension phase
✅ A not-for-profit organisation or charity
✅ A shareholder receiving income through a family trust or company structure
To be eligible, the income must come from franked dividends issued by an Australian company. Your dividend statement will show the franked amount and the franking credit separately.
If your franking credits exceed your actual tax liability, you may qualify for a refund, especially common for retirees, SMSFs, and low-income investors. The Australian Taxation Office (ATO) processes these credits as part of your annual tax return.
How to Claim Franking Credits on Your Tax Return
Claiming franking credits is generally a straightforward process, but understanding each step can help you ensure everything is reported correctly.
Here is how it works:
1. Receive a dividend statement
When a company pays you a dividend, they will issue a dividend statement. This document shows how much was paid, how much of it was franked, and the value of the franking credit attached. It serves as your official record for tax purposes.
2. Check your pre-filled tax return
If you lodge your tax return through MyGov or a registered tax agent, the dividend and franking credit details are usually pre-filled by the ATO. Even so, it is a good idea to cross-check the pre-filled information with your dividend statements to confirm everything is accurate.
3. Add the grossed-up dividend to your assessable income
The ATO treats the dividend you received along with the franking credit as income. This combined figure is known as the grossed-up dividend and is included in your total taxable income.
4. Apply the franking credit as a tax offset
Once your total tax payable is calculated, the franking credit is applied as a tax offset. This helps reduce the amount of tax you owe.
5. Receive a refund if eligible
If the franking credits are greater than the amount of tax you owe, the ATO may refund the difference. This can be especially beneficial for low-income earners, retirees, or SMSFs in the retirement phase.
By following these steps and maintaining clear records, you may be able to claim the full value of any franking credits attached to your dividends.
How Are Franking Credits Reported and Refunded?
When you receive a dividend from an Australian company, your dividend statement will include key information such as:
- The franked amount (the portion of your dividend that carries a franking credit)
- The franking credit (the tax the company has already paid)
- The franking percentage (for example, 100 per cent if fully franked)
These details must be included in your tax return. The Australian Taxation Office adds the franking credit to your assessable income, but it is also treated as tax already paid on your behalf. If the credit is greater than the tax you owe, the ATO may refund the difference.
Refunds for Not-for-Profit Organisations
Not-for-profit organisations that receive franked dividends may also be eligible for a refund. If they are not required to lodge a full tax return, they can claim their franking credits by submitting the Refund of Franking Credits for Not-for-Profit Organisations form (NAT 4131). This form can be lodged online or on paper, and there is no minimum threshold to apply. Refunds can generally be claimed annually, which may provide value even for modest investment holdings.
Refund applications are typically due at the end of the financial year and can be submitted via the ATO’s Business Portal or Online Services for Business.
The franking credit system is designed to avoid taxing the same income twice. Companies pay tax on their profits before distributing dividends, and investors receive a credit for that tax, resulting in a fairer outcome for individuals and organisations alike.
Franking Credits Holding Period Rule
To be eligible for franking credits, you generally need to meet what the Australian Taxation Office refers to as the holding period rule. Under this rule, you must hold your shares “at risk” for a minimum of 45 continuous days, excluding both the purchase and sale dates. The intention is to ensure investors are genuinely exposed to the risk of share ownership rather than simply timing trades to claim credits.
The rule usually applies if your total franking credits exceed $5,000 in a financial year. This threshold is assessed per individual, not per account or investment. For those holding shares through a trust or company, the rule can also apply depending on the structure of ownership.
Certain entities, such as many self-managed super funds (SMSFs) and eligible not-for-profit organisations, may be exempt from this requirement. However, even with possible exemptions, it’s important to be aware of the rule and how it might apply to your specific circumstances.
SMSFs, Trusts, and Franking Credits
Franking credits can play a significant role in the tax strategies of both SMSFs and trusts, particularly when structured and reported correctly.
For Self-Managed Super Funds, franking credits are especially valuable during the pension phase. Since income earned in this phase is generally tax-free, any franking credits received may result in a full refund from the ATO. This may improve overall investment returns, which could make fully franked dividends an appealing option for retirees drawing income from their SMSF.
Trusts can also benefit from franking credits, but the process is slightly more complex. In order to pass franking credits to beneficiaries, the trust must distribute the franked income appropriately and maintain proper documentation. When done correctly, this allows beneficiaries to use the credits to offset their own tax obligations, potentially improving after-tax returns.
Understanding how franking credits interact with these structures is an important part of tax planning for investors focused on long-term wealth creation.
Franking Credit Mistakes to Avoid
Franking credits can provide valuable tax offsets or refunds, but there are several pitfalls that can lead to rejected claims or unintended tax consequences:
❌ Failing the holding period requirement
Selling shares too soon after receiving dividends may disqualify your claim if you haven’t met the 45-day holding rule.
❌ No genuine risk exposure
Using strategies that eliminate the risk of loss during the holding period can make you ineligible for credits under ATO guidelines.
❌ Dividend washing
Buying and selling the same shares around the dividend date to double up on credits is not allowed and may be flagged by the ATO.
❌ Inaccurate reporting
Not including or incorrectly declaring franking credits in your tax return may lead to delays, reduced refunds, or a possible review by the ATO.
Staying up to date with these rules and keeping accurate records may help you make the most of your franking credits while reducing the risk of errors or missed entitlements.
How Franking Credits Can Support Loan Serviceability
Franking credits may not only help reduce your tax liability, but they could also support your position when applying for a loan. Some lenders, especially those with experience in SMSFs and investment income, may consider franked dividends as part of your overall income when assessing your borrowing capacity. This typically depends on how consistent the income is and whether it is backed by appropriate documentation.
This can be especially helpful if:
- You’re self-employed and receive both business and investment income
- You’re semi-retired or retired and draw regular income from fully franked dividends
- You’re investing through a trust or SMSF with stable income from listed shares
Looking to use your investment income to strengthen your loan application? A mortgage broker can help ensure franking credits and other income sources are clearly presented and recognised by the right lenders.
Use Franking Credits to Strengthen Your Investment and Tax Planning
Franking credits are a great example of how understanding the tax system can work in your favour. While they may seem complex at first, the core idea is straightforward, and the potential benefits can be significant, especially when aligned with a well-structured investment and financial strategy.
Whether you’re new to investing or already managing a portfolio, having the right financial structure in place can make all the difference. A clear understanding of how your investments, tax position, and borrowing capacity work together can help you move forward with greater confidence.
Let’s make your money work smarter. Speak with Unconditional Finance to explore SMSF lending options, understand how your investment income fits into your broader financial goals, and get tailored guidance to support your next move.
Frequently Asked Questions (FAQS)
1. Is there a maximum amount I can claim in franking credits each year?
There is no fixed limit on the amount of franking credits you can claim. However, if your total franking credits exceed $5,000 in a financial year, the holding period rule applies. This means you must hold the shares at risk for at least 45 continuous days to remain eligible for the credits.
2. What happens to unused franking credits if I do not lodge a tax return?
If you are not required to lodge a full tax return, you may still be able to receive a refund by submitting a separate form to the ATO. For instance, not-for-profit organisations can use the Refund of Franking Credits form (NAT 4131). Unused credits cannot be carried forward to future years, so it is important to claim them in the same financial year they are received.
3. Can non-residents claim franking credits?
No, non-residents are not eligible to claim refunds for franking credits. However, franked dividends are not subject to Australian withholding tax, which can still make them a tax-efficient source of income for overseas investors.
4. Can franking credits reduce tax on other types of income, like salary or rental income?
Yes. Franking credits are treated as tax already paid and can be used to reduce your total tax payable. This means they may be applied to offset tax on any type of assessable income, including salary, business income, or rental earnings.
5. Are franking credits passed on when shares are transferred to another person?
No. Franking credits do not transfer with the shares. Only the person who held the shares at the time the dividend was paid, and who meets the eligibility criteria, can claim the associated franking credits.
