Franking credits are best known for reducing a tax bill, but for many investors they do something better, they come back as a cash refund. This is one of the quirks of the Australian system that rewards share investors on lower tax rates. Here is how franking credit refunds work, who benefits, and the catches to know.

Franking credits are prepaid tax

When an Australian company pays a franked dividend, it has already paid company tax on that profit, generally at 30%. The franking credit attached to your dividend represents that tax already paid. The idea, called dividend imputation, is to avoid taxing the same profit twice, once in the company and again in your hands.

How the gross-up works

At tax time you declare the cash dividend plus the franking credit, which together are the grossed-up dividend, as income. You then get the franking credit back as a tax offset. So you are taxed on the larger grossed-up figure, but you carry a credit for the tax the company already paid on your behalf.

Refund or top-up

What happens next depends on your marginal tax rate:

• Below 30%. The credit is worth more than the tax owed on that dividend, and the excess is refunded to you in cash.
• Around 30%. The credit roughly cancels the tax on the dividend.
• Above 30%. The credit does not cover all the tax, so you pay the difference rather than getting a refund.

A quick example

You receive a $700 fully franked dividend with a $300 franking credit, so you declare $1,000 of income. If your marginal rate is 19%, the tax on that $1,000 is $190, but you hold a $300 credit, so the $110 difference is refunded to you. On a 37% rate, the tax would be $370, so instead of a refund you would pay $70 more. Same dividend, opposite outcome, driven by your tax rate.

Who benefits most

Refunds flow most often to people on lower marginal rates, including part-time earners and many retirees, and to complying super funds in pension phase, where the fund's tax rate is very low or nil. For these investors, franking credits can be a meaningful slice of the total return from Australian shares.

The 45-day holding rule

There is an integrity rule worth knowing. To claim franking credits above a small threshold, you generally need to hold the shares at risk for at least 45 days around the dividend, not counting the days you buy and sell. It is designed to stop people buying in purely to grab the credit and selling straight after.

How you claim it

You do not apply separately for a refund. You declare your dividends and franking credits in your tax return, and the offset, and any refund, are worked out from there. The key is capturing every franking credit in the first place, because an unrecorded credit is a refund you never claim.

Capture every credit

Summ records the franking credit on every dividend, including reinvested ones, so nothing is left on the table at tax time.

Get started with Summ.

Frequently asked questions

Can franking credits be paid as a cash refund? Yes. If your credits exceed the tax you owe, the excess is refunded, most often for investors on lower rates.

Do I need to be retired to get a refund? No. Anyone whose franking credits exceed their tax on that income can receive a refund, though retirees and low earners benefit most.

What is the 45-day rule? To claim the credits above a small threshold, you generally must hold the shares at risk for at least 45 days around the dividend.

Do reinvested dividends still carry franking credits? Yes. Dividends reinvested through a DRP carry franking credits just like cash dividends.

This article is general information only and does not take your personal circumstances into account. For advice specific to your situation, speak to a registered tax agent.