Australia Franking Credits Guide

the franking credits (the "Australian dividend imputation system") for the shareholders and the investors. The guide covers: the franking credits mechanism (the "tax paid by the company on the profits") — the Australian dividend imputation system allows the company to allocate the tax paid (the "company tax at 25% or 30%") to the shareholders through the "franking credits" attached to the dividends; the "franked dividend" includes both the "cash component" and the "franking credits component"; the shareholder must include the "grossed-up dividend" (the "cash dividend plus the franking credits") in the assessable income; the franking percentage and the franking credits calculation — the "franking percentage" (the "100% fully franked, the 50% partially franked, the 0% unfranked") determines the amount of the franking credits attached to the dividend; the franking credits are calculated as: (the "cash dividend") times (the "franking percentage") times (the "corporate tax rate" divided by the "1 minus the corporate tax rate"); for the fully franked dividend at the 30% rate, the franking credits = the "cash dividend" times the "30/70"; the franking credit offset (the "reduction of the tax payable" or the "refund") — the shareholder includes the "grossed-up dividend" in the assessable income and claims the "franking credit offset" against the tax liability; if the franking credits exceed the tax liability, the excess is "refundable" to the shareholder (the "no cap on the refund" for the Australian residents); the eligibility and the restrictions — the franking credits are available only to the "Australian resident shareholders" who hold the shares "at risk" (the "no hedging or the protected positions"); the "45-day holding period rule" (the "holding the shares at risk for at least 45 days" around the ex-dividend date) applies to the "individuals and the super funds" claiming the franking credits on the dividends of the $5,000 or more; the "small shareholder exemption" (the "total franking credits below $5,000") removes the holding period requirement.

Franking Credits Calculation and the Grossed-Up Dividend

Grossed-up dividend calculation: The "grossed-up dividend" equals the "cash dividend received" plus the "franking credits attached". For the company paying the fully franked dividend of "$700 cash" using the 30% corporate tax rate, the franking credits = $700 times (30/70) = $300. The "grossed-up dividend" = $700 + $300 = $1,000. The shareholder declares the $1,000 in the assessable income and claims the $300 as the franking credit offset.
Company tax rate effect: The "base rate entity (the BRE)" with the aggregate turnover below $50 million pays the 25% corporate tax rate. The franking credits for the fully franked dividend from the BRE = the "cash dividend" times the "25/75". For the fully franked dividend of "$750 cash" from the BRE, the franking credits = $750 times (25/75) = $250, and the grossed-up dividend = $750 + $250 = $1,000. The large company with the turnover above $50 million pays the 30% rate. The "franking credit ratio" is adjusted automatically by the company.
Excess franking credits refund: The Australian resident individual with the "franking credits exceeding the tax liability" receives the "cash refund" of the excess from the ATO. The retiree with the $18,200 tax-free threshold may receive the full amount of the franking credits as the cash refund. The ATO processes the refund through the "tax return lodgement" and the "notice of assessment".

For the dividend investing and the blue-chip stocks on the ASX, see our Blue-Chip Dividend Stocks Guide →.

45-Day Holding Period Rule

Holding period requirement: The "45-day holding period rule" requires the shareholder to hold the shares "at risk" for at least "45 days" (the "90 days for the preference shares") in the "primary qualification period" around the ex-dividend date. The primary qualification period starts on the "45th day before the ex-dividend date" and ends on the "45th day after the ex-dividend date". The shareholder must hold the shares for at least 45 days within this period.
Small shareholder exemption: The shareholder is exempt from the 45-day holding period rule if the total franking credits claimed in the income year are below the "$5,000 threshold". The exemption applies automatically — the shareholder does not need to notify the ATO. The shareholder with the franking credits below $5,000 can claim the credits without the holding period requirement.
At-risk requirement: The shares must be held "at risk" — the shareholder must not have the "materially reduced exposure to the risks of the loss and the opportunities for the gain" on the shares. The hedging arrangements (the "put options, the short sales, the total return swaps") that reduce the exposure to the share price movements may disqualify the franking credits even if the 45-day holding period is satisfied.

For the CGT rules on the share disposals, see our Capital Gains Tax Guide →.

Dividend Imputation System and the Company Level

Franking account: The Australian company maintains the "franking account" to track the "franking credits" (the "tax paid") and the "franking debits" (the "dividends paid"). The franking credits arise when the company pays the "pay as you go (the PAYG) instalments", pays the "franking deficit tax", or receives the "franking credits on the dividends from the other Australian companies". The franking debits arise when the company pays the "franked dividends".
Franking deficit tax: The company with the "deficit in the franking account" at the end of the income year must pay the "franking deficit tax" at the rate of 30% of the deficit. The "late debits" (the "debits that should have been made in the earlier year") may attract the "franking additional tax" at the rate of 30% plus the penalty interest.
Streaming and the anti-avoidance: The ATO applies the "dividend streaming rules" to prevent the company from directing the franked dividends to the shareholders who benefit most from the franking credits (the "tax residents") and the unfranked dividends to the shareholders who do not benefit (the "non-residents" or the "tax-exempt entities"). The "Subdivision 207-D" (the "franking credit integrity rule") denies the franking credits to the "tax-exempt entities" such as the charities, the universities and the government entities.

For the tax treatment of the investment income from the shares and the ETFs, see our Investment Income Tax Guide →.