If you run a company or own shares, franking credits are one of the more elegant parts of the Australian tax system. They exist to solve a simple problem: without them, the same dollar of profit would be taxed twice, once when the company earns it and again when you take it home. Once you understand how the pieces fit together, dividend planning gets a lot less mysterious.
The double-tax problem franking credits solve
A company is a separate taxpayer. It pays tax on its profit each year. When it later pays some of that after-tax profit to shareholders as a dividend, the shareholder would normally include that dividend in their own income and pay tax on it too.
Left unfixed, that means one batch of profit copping tax at two levels. Australia's dividend imputation system (the formal name for franking) is designed to stop that, so company profit is generally taxed once, at the owner's own rate.
How the company gets taxed first
The company pays tax on its taxable profit before anything reaches shareholders. The rate depends on the company:
- 25% for a base rate entity, broadly a company with aggregated turnover under $50 million where no more than 80% of its income is passive (such as interest, rent or dividends).
- 30% for companies that do not meet the base rate entity test.
Whichever rate applies, the tax the company actually pays is tracked in something called the franking account. That balance is what allows the company to attach franking credits to dividends later. No tax paid generally means no credits to pass on.
How franking credits flow to you
When the company pays a dividend, it can attach a franking credit representing the tax it already paid on that profit. A dividend can be fully franked, partly franked or unfranked, depending on how much tax sits behind it.
On your own return the steps are:
- You include the cash dividend you received as income.
- You also include the attached franking credit, which is called "grossing up". In effect you declare the pre-tax profit, not just the cash.
- You then claim the franking credit as an offset against your tax bill on that grossed-up amount.
The result is that the profit is taxed once overall, at your marginal rate, with the company's earlier payment counted toward it rather than lost.
Why your own tax rate is the key
Because the credit is applied at your personal rate, the outcome depends on where you sit. Australia's 2025-26 individual rates are nil up to $18,200, then 16% to $45,000, 30% to $135,000, 37% to $190,000 and 45% above that, plus the 2% Medicare levy for most people. Compared with the company's 25% or 30%, three broad situations can arise:
- You are on a higher rate than the company. The credit covers part of your tax on the dividend and you generally top up the difference.
- You are on a similar rate. The credit may roughly cover the tax on the dividend, with little extra to pay.
- You are on a lower rate, or pay no tax. The credit can exceed your tax on the dividend, and the excess may be refundable to eligible individuals and some other entities.
When franking credits can be refunded
This is the part that surprises people. For eligible individuals and certain low-rate entities, franking credits are not just a tax reduction; any excess after wiping out your tax can come back as a cash refund. That is why fully franked dividends can be valuable to people such as low-income earners and some retirees, where the company has already paid tax at a higher rate than the shareholder.
Whether a refund applies, and how much, depends on your circumstances and on rules that can change, so it is worth checking the current ATO position rather than assuming.
What this means if you run a company
If you draw profits out of your own company as dividends, franking is central to planning. A few practical points:
- The company must have actually paid tax for franking credits to exist; a freshly profitable company may have limited credits early on.
- The timing of when you declare dividends affects which year the income, the gross-up and the credit land on your personal return.
- Mixing salary and dividends changes your overall position, because each is taxed differently.
- Paying an unfranked dividend is allowed, but the shareholder does not get a credit for tax the company has not paid.
Good franking planning is about matching the company's tax position to the shareholders' rates, so the same profit is not taxed harder than it needs to be. We can model the cash flow and tax effect with you before you commit to a dividend strategy.
Talk it through with us
Franking rewards a bit of planning, especially when you control both the company and your own return. Book a chat at nebulaaccounting.au or call 0433 822 227.
This article is general information only and does not take account of your personal circumstances — it is not personal tax, financial or legal advice. Tax laws change and apply differently to different people. Nebula Accounting Pty Ltd is a registered tax agent (No. 26259377); please speak with us or check with the ATO before acting.