This guide explains general concepts for educational purposes. It is not financial, tax or legal advice, or a recommendation to buy, sell, hold or change a financial product or strategy. It does not take into account your objectives, financial situation or needs. Rules, caps, thresholds and product terms can change. Check the current official information and obtain advice appropriate to your circumstances before making a financial decision.
What a franking credit represents
When an Australian-resident company pays tax and distributes eligible profits as a franked dividend, it may attach a franking credit representing some or all of the company tax already paid.
The credit is not a separate guaranteed investment return. Dividends can change, a company may distribute an unfranked or partly franked dividend, and both the share price and the investor’s capital remain exposed to market and company risk.
How it is treated in a tax return
An eligible Australian resident generally includes both the cash dividend and attached franking credit in assessable income, then claims the credit as a tax offset. Depending on the investor, tax position and current rules, the credit may reduce tax payable or potentially contribute to a refund.
Eligibility is subject to integrity rules, including holding-period and related-payment requirements in relevant cases. Treatment can differ for individuals, companies, trusts, superannuation funds and non-residents, so the outcome should be confirmed for the actual owner.
Consider the whole portfolio
Franking credits can improve after-tax income for some investors, but selecting investments primarily for franking can create excessive exposure to Australian companies, dividend-paying sectors or a small number of shares.
Compare total expected return after fees and tax, diversification, dividend sustainability, capital risk and the role of the investment within the portfolio. Tax and franking rules can change, and current financial and tax advice should be obtained before acting.
Cash received and income reported
The cash dividend is the amount paid to the shareholder. The attached credit records tax already paid at company level. For an eligible investor, tax reporting brings those components together and then applies the offset, rather than treating the credit as an extra cash dividend from the company.
A quoted dividend yield can therefore differ from a figure that includes franking credits. Comparisons need to state which measure is being used. The benefit of a credit also depends on the investor's eligibility and tax circumstances.
Income within the investment result
A company can change its dividend policy as earnings and funding needs change. Its share price can also move independently of the most recent dividend. A franked distribution is consequently one component of return rather than evidence that capital is protected.
An investment portfolio may receive income from Australian shares, overseas shares, interest and other sources. These have different tax characteristics. Understanding the mix explains how the portfolio produces income without assuming that the highest franked yield is the most appropriate investment.