Dividend Imputation and Franking Credits
How Australia's full imputation system works, the franking credit formula at 25% and 30%, refundable credits for individuals and super funds, franking account mechanics, franking deficit tax, and the anti-avoidance rules that protect the system.
Australia's dividend imputation system under Part 3-6 of ITAA 1997 allows companies to pass on credit for tax already paid at the corporate level by attaching franking credits to dividends. Resident shareholders include the grossed-up dividend in assessable income and claim a tax offset equal to the credit. For individuals and complying super funds, excess credits are fully refundable, making Australia unusual among major economies in offering cash refunds where the shareholder's marginal rate is lower than the company rate.
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How the imputation system works
Part 3-6 of ITAA 1997 sets up Australia's full imputation system. Companies record tax paid in a franking account and attach franking credits to frankable distributions. A resident shareholder who receives a franked dividend includes the cash dividend plus the attached franking credit (the gross-up) in assessable income under s 207-20 ITAA 1997, then claims a tax offset equal to the franking credit. For individuals and complying super funds, excess credits over basic tax liability are refundable. Only a qualified person is entitled to the franking tax offset: integrity rules (including s 207-145 and the holding period rule) can cancel the gross-up and offset where franking schemes are involved.
The franking credit formula
For a company taxed at rate T, the franking credit on a fully franked cash dividend equals: dividend multiplied by T divided by (1 minus T). For a 25% company paying a $100 cash dividend: $100 multiplied by 0.25 divided by 0.75 equals $33.33. The grossed-up assessable amount is $133.33. For a 30% company: $100 multiplied by 0.30 divided by 0.70 equals $42.86, producing a $142.86 grossed-up amount.
Fully, partially, and unfranked dividends
A fully franked dividend has the maximum franking credit attached, capped at the company's corporate tax rate for imputation purposes. A partially franked dividend (for example, 50% franked) typically arises because the company has insufficient credits or mixed taxed and untaxed income sources. An unfranked dividend carries no franking credit, usually because profits arose from non-taxable income, tax losses offset taxable income, or foreign-source profits did not bear Australian company tax.
Tax outcomes at different marginal rates
The imputation system produces different outcomes depending on the shareholder's marginal rate. Devi in Hobart earns a $100 fully franked dividend from a 25% company. The grossed-up amount is $133.33 and the franking credit is $33.33.
Franking account mechanics
Every corporate tax entity must maintain a franking account, a notional ledger of franking credits and debits under Part 3-6 of ITAA 1997.
Credits
The franking account is credited for income tax paid (including PAYG instalments later reconciled as income tax), franked dividends received from other companies, and franking deficit tax paid that can later be offset.
Debits
The account is debited for franking credits attached to dividends paid, tax refunds received, and certain other events such as ceasing to be a franking entity.
Franking deficit tax
If the franking account is in deficit at year end (or when an entity ceases to be a franking entity), the entity owes franking deficit tax, due by the last day of the month after year end. FDT is imposed at the company tax rate on the deficit and can generally be carried forward as a tax offset against future income tax. However, where the deficit exceeds 10% of total credits for the period, the FDT offset reduction rule denies 30% of the relevant FDT as an offset, converting a timing problem into a permanent cost.
Anti-avoidance and integrity rules
The imputation rules include several layers of protection against manipulation.
Streaming prohibition
The imputation rules prohibit streaming franking credits selectively to shareholders who benefit most (such as residents or super funds) while directing unfranked dividends to others. The Commissioner can deny imputation benefits or treat distributions as unfrankable where streaming or related schemes are present.
Holding period rule
To claim franking credits, you must satisfy the holding period rule: 45 days at risk for ordinary shares, 90 days for preference shares (not counting the day of acquisition or disposal). The small shareholder exemption disapplies the holding period requirement where your total franking credit entitlement for the year is below $5,000. The $5,000 threshold roughly corresponds to fully franked dividends of approximately $15,000 from a 25% company.
Dividend stripping (s 177EA)
Section 177EA of ITAA 1936 is the imputation general anti-avoidance rule. It allows the Commissioner to cancel imputation benefits where there is a scheme for a disposition of membership interests with a purpose of obtaining an imputation benefit. Section 207-159 of ITAA 1997 works alongside this provision to make distributions funded by capital raisings unfrankable.
Franking credits and superannuation funds
Franking credits have an outsized impact in superannuation. Complying super funds in accumulation phase are generally taxed at 15% on investment earnings. A fully franked dividend from a 30% company provides a 30% credit against 15% tax, often yielding a net refund of the difference. In pension phase, fund earnings on supporting pension balances can be taxed at 0%, meaning fully franked dividends generate a full cash refund of franking credits. This is the core reason Australian portfolios often tilt towards fully franked dividend streams rather than pure capital-growth strategies, particularly in retirement.
International comparison
Australia's full imputation system with refundable credits is unusual among major economies.
Key statute references
The legislative framework for dividend imputation and franking credits sits primarily in ITAA 1997 with supporting anti-avoidance provisions in ITAA 1936.
Franking credits + trust distributions — getting it right under Division 207
When a discretionary trust receives a franked dividend and streams it to a beneficiary, the franking credit can flow with the dividend — but only if the trust meets specific conditions. CONDITIONS FOR STREAMING (Division 207 ITAA 1997, s 207-58): (1) The trust deed must allow streaming of franked dividends to specific beneficiaries. (2) The streaming must be documented in the trust resolution by 30 June. (3) The beneficiary must be "specifically entitled" to the franked income under the resolution. If the conditions are met, the beneficiary includes the gross-up and claims the franking credit on their own return. If the conditions fail, franking credits are spread pro rata across all beneficiaries based on their share of trust income — diluting the tax benefit for high-marginal-rate beneficiaries and creating issues for low-marginal-rate beneficiaries who cannot fully use the credit. WORKED EXAMPLE. The Patel Family Trust — Adelaide, SA — receives a $14,000 fully franked dividend with $6,000 franking credit attached. Beneficiaries: Raj (32, salary $180,000, marginal rate 37%) and Priya (27, postgrad student, no other income). Scenario A — streamed to Priya. Priya's assessable income from the distribution: $14,000 + $6,000 gross-up = $20,000. Tax payable: $0 (within tax-free threshold plus LITO). Franking credit $6,000 refundable in cash. Result: $6,000 cash refund to Priya. Scenario B — streamed to Raj. Raj's assessable income increases by $20,000. Marginal tax at 37% = $7,400. Less franking credit $6,000. Result: $1,400 net tax payable on the distribution. Same dividend — $6,000 cash refund vs $1,400 net tax payable, depending solely on streaming. The trust deed plus the 30 June resolution determines which. INTEGRITY OVERLAY. The 45-day holding period rule (s 160APHO ITAA 1936) requires the trust to have held the shares at risk for at least 45 days before becoming entitled to the franking credit. A "small shareholder" exemption (franking credits $5,000 or less) does NOT apply to trust distributions to non-individual beneficiaries. Statute: Division 207 ITAA 1997, ss 207-50 and 207-58. Holding period rule s 160APHO ITAA 1936. Try the [Franking Credit calculator](/franking-credit-calculator).
Statute references
- ITAA 1997 Part 3-6 (Imputation system)
- ITAA 1997 s 207-20 (Gross-up and tax offset)
- ITAA 1997 s 207-145 (Qualified person requirement)
- ITAA 1997 Subdivision 207-E (Refundable credits)
- ITAA 1997 Subdivision 203-B (Benchmark franking rule)
- ITAA 1936 s 177EA (Imputation GAAR)
Frequently asked questions
Can I get a cash refund of franking credits if I earn below the tax-free threshold?+
What is franking deficit tax and when does it apply?+
How does the 45-day holding period rule work for small shareholders?+
Do franking credits affect my Medicare Levy Surcharge or HELP repayments?+
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