Fully Franked Dividend ASX: How Franking Credits Work for Australian Investors
Dividends are one of the main ways shareholders receive income from ASX-listed companies.
However, the amount that reaches your bank account is not always the full story. Some Australian companies attach franking credits to their dividends, which can change the tax outcome for the shareholder.
This is where the term fully franked dividend ASX often appears.
A fully franked dividend is a payment made from company profits on which the company has already paid Australian corporate tax. The attached franking credit represents the tax that has already been paid.
The purpose of the system is to reduce the chance of the same company profit being taxed twice. Once by the company and then again when the dividend is received by the shareholder.
The final result depends on several things, including your personal tax rate, the company’s tax rate, your investment structure and whether you meet the eligibility rules.
What is a fully franked dividend?
A fully franked dividend is a dividend that carries a franking credit for the full amount of tax paid by the company on the profits being distributed.
The Australian company earns a profit, pays tax on that profit and then distributes part of the remaining amount to shareholders.
For example, imagine a company earns $100 before tax.
If the company tax rate is 30%, it pays $30 in company tax. That leaves $70 available to distribute as a dividend.
The shareholder receives:
- Cash dividend: $70
- Franking credit: $30
- Grossed-up dividend: $100
The $30 franking credit shows that tax has already been paid on the original $100 of company profit.
The shareholder does not receive the $30 as cash in their bank account. Instead, it appears as a tax credit that can be used to reduce their tax liability.
This is the basic idea behind the Australian dividend imputation system. The Australian Taxation Office explains that tax paid by a company can be attributed to shareholders through franking credits attached to dividends.
Why does Australia use franking credits?
Before the imputation system, company profits could effectively be taxed twice.
The company first paid tax on its profits. If those profits were later paid out as dividends, the shareholder could also pay income tax on the dividend.
The franking credit system was introduced to recognise the tax already paid by the company.
For me, the easiest way to understand it is to treat the franking credit as a record of tax already paid. It is not an extra dividend payment, but it can reduce the tax that applies to the income received by the shareholder.
This system is designed to make Australian company dividends more tax-effective for eligible Australian investors.
It also means that the cash amount of a dividend is not always the same as its total tax value. A $700 cash dividend with a $300 franking credit has a grossed-up value of $1,000 for tax purposes.
That does not mean the investor has received $1,000 in cash. The investor has received $700, while the company has already paid $300 in tax on the underlying profit.
How does the fully franked dividend calculation work?
The franking credit formula is based on the company tax rate.
If the company tax rate is 30%, the formula is:
Franking credit = cash dividend × company tax rate ÷ (1 − company tax rate)
For a $700 fully franked dividend:
$700 × 30% ÷ 70% = $300
The result is:
- Cash dividend: $700
- Franking credit: $300
- Grossed-up dividend: $1,000
Another way to write the same calculation is:
Franking credit = (cash dividend ÷ 0.70) − cash dividend
Using the same example:
($700 ÷ 0.70) − $700 = $300
The tax rate used in the calculation is important. Not every company has the same tax rate, so investors should use the information shown on the dividend statement rather than assume that every dividend has a 30% franking credit.
Large Australian companies are commonly associated with the 30% corporate tax rate, while some eligible smaller companies may use a different rate.
What does “grossed-up dividend” mean?
The grossed-up dividend is the cash dividend plus the attached franking credit.
It is the amount that is generally included in your assessable income before the franking tax offset is applied.
Using the earlier example:
- Cash dividend: $700
- Franking credit: $300
- Grossed-up amount: $1,000
The investor includes the $1,000 grossed-up amount in their tax calculation.
They then claim the $300 franking credit as a tax offset.
This is an important difference. Some new investors see $700 arrive in their bank account and assume that $700 is the only amount relevant to their tax return. The dividend statement may show a higher grossed-up amount.
The statement provided by the company or share registry should show the cash dividend, the franking credit and the franking percentage.
Fully franked, partly franked and unfranked dividends
Not every dividend paid by an ASX company is fully franked.
Fully franked dividend
A fully franked dividend is 100% franked. The company has paid tax on the full amount of the profit being distributed.
The shareholder receives the full associated franking credit, subject to meeting the eligibility requirements.
Partly franked dividend
A partly franked dividend has both a franked component and an unfranked component.
For example, a dividend may be 50% franked. In that case, the company has paid tax on only part of the profit being distributed.
The shareholder receives a franking credit for the franked portion, but not for the unfranked portion.
The tax outcome may therefore be different from a fully franked dividend of the same cash amount.
Unfranked dividend
An unfranked dividend has no franking credit attached.
The shareholder still needs to declare the dividend as income, but there is no company tax credit available to offset the tax payable on that dividend.
The ATO states that dividend statements should identify the franked and unfranked amounts and the associated franking credit.
How does your tax rate change the outcome?
The same fully franked dividend can produce different results for different investors.
Assume an investor receives:
- Cash dividend: $700
- Franking credit: $300
- Grossed-up dividend: $1,000
Investor on a 45% marginal tax rate
Tax on $1,000 at 45% would be $450, before considering other details such as the Medicare levy.
The investor then applies the $300 franking credit.
The remaining tax would be $150 in this simplified example.
Investor on a 19% marginal tax rate
Tax on the $1,000 grossed-up dividend at 19% would be $190.
The $300 franking credit covers the $190 tax amount. The remaining $110 may be refundable, depending on the investor’s full tax position and eligibility.
Tax-exempt investor
A tax-exempt entity may have no tax payable on the grossed-up dividend.
If it is eligible to receive refundable franking credits, the entire $300 credit could potentially be refunded.
These examples are simplified and do not include every part of an individual’s tax return. Other income, deductions, Medicare levy obligations, capital gains and investment structures can all affect the final result.
The key point is that the benefit of a fully franked dividend depends on the shareholder’s own tax position.
What are franking credits worth to retirees?
Fully franked dividends are often discussed in relation to retirees and superannuation funds.
An investor in a lower tax bracket may use the franking credit to reduce tax on the dividend and potentially receive a refund for any excess credit.
A superannuation fund can also have a different tax outcome depending on whether it is in accumulation phase or pension phase.
In accumulation phase, the fund may pay tax at a concessional rate. Franking credits can be used to offset tax on the associated dividend and potentially other taxable income of the fund.
In pension phase, some investment income may be exempt from tax, subject to the relevant rules. This can mean the franking credit has a greater effect on the fund’s final tax position.
That is why fully franked dividends are sometimes considered when people are planning retirement income.
However, the tax treatment depends on the fund, the account structure and the member’s circumstances. It should not be assumed that every superannuation investor will receive the same outcome.
The 45-day holding period rule
One of the main rules investors need to understand is the holding period rule.
Generally, an investor must hold shares “at risk” for at least 45 continuous days to claim attached franking credits. The purchase day and sale day are generally not counted.
The purpose of this rule is to stop investors from buying shares immediately before the ex-dividend date, receiving the dividend and then selling shortly afterwards purely to obtain the franking credit.
This practice is sometimes described as dividend stripping.
There are exceptions and additional rules. For example, some individual investors may qualify for a small shareholder exemption where their total franking credits are below the relevant threshold. Related payment rules can also affect eligibility.
The exact rules can be difficult when shares are traded frequently or when an investor uses certain derivatives or arrangements.
For that reason, investors should not assume that receiving a fully franked dividend automatically means they can claim the full credit.
How to find the information on a dividend statement
When an ASX company pays a dividend, the shareholder usually receives a dividend or distribution statement.
The statement may include:
- The amount of the cash dividend
- The franking percentage
- The franking credit amount
- The unfranked portion, if applicable
- The date of payment
- The company’s tax information
A fully franked dividend should show that the franking percentage is 100%.
The information may also be available through a share registry or tax statement.
The figures from the statement are generally used when preparing a tax return. It is important to keep these records because dividend payments may occur several times during the financial year.
What are the advantages of fully franked dividends?
The main benefit is the potential reduction in double taxation.
The company has already paid tax on the profit, and the franking credit recognises that payment when the dividend reaches the shareholder.
Other possible advantages include:
- Lower personal tax payable on dividend income
- A possible refund of excess franking credits for eligible investors
- A clearer view of the total tax-paid value of the dividend
- Potential income support for investors using dividend-paying shares
- Greater transparency about tax paid at the company level
A company that pays fully franked dividends is generally distributing profits on which Australian company tax has already been paid.
However, a fully franked dividend is not automatically better than an unfranked dividend. The dividend yield, company earnings, balance sheet and future growth also matter.
A high dividend can be reduced or cancelled if the company’s profits weaken.
Common mistakes investors make
One common mistake is focusing only on the cash dividend.
A $700 fully franked dividend and a $700 unfranked dividend are not identical from a tax perspective. The fully franked dividend may carry a tax credit, while the unfranked dividend does not.
Another mistake is assuming that a high yield means a company is financially strong.
A company’s dividend yield can rise simply because its share price has fallen. That may indicate the market is concerned about future earnings or the sustainability of the payout.
Investors can also misunderstand the holding period rule. Buying a share shortly before the ex-dividend date does not necessarily mean the franking credit can be claimed.
There can also be errors when dividends are held through trusts, companies or superannuation funds. The tax treatment may differ depending on the structure.
Final thoughts
A fully franked dividend is more than a cash payment from an ASX company.
It also includes a record of company tax already paid. The attached franking credit can reduce the shareholder’s tax liability, but the final result depends on personal income, tax rates, eligibility rules and the structure used to hold the shares.
For me, the simplest way to understand the system is to separate three figures:
- The cash dividend received
- The franking credit attached
- The grossed-up dividend used in the tax calculation
Once these figures are understood, the system becomes easier to follow.
Investors should keep dividend statements, check the relevant holding period rules and obtain professional tax advice where their situation involves trusts, companies, superannuation or frequent share trading.