The widow, the franking credits, and the $12,000 windfall

Whenever I give a presentation about investing I ask the audience how much they know about franked dividends. It doesn’t matter whether they’re working or retired, the response is always the same: nothing.

So I give them a quick summary of the franking system, explaining how companies that have paid Australian company tax have franking credits available, which they then pass on to their shareholders.

A lack of knowledge about how Australia’s franking credits system works means many could be sitting on surprise payouts.Credit: Dominic Lorrimer

This lack of knowledge is a sad state of affairs given that the franked dividend system allows almost everybody earning under $135,000 a year to receive tax-free dividend income from 1 July.

Let’s assume a person is earning $130,000 a year and has a $100,000 portfolio of Australian shares paying fully franked dividends. In the year ending 30 June 2025 the dividend was $4000 and the growth was $5000. That’s a total return of $9000.

There is no capital gains tax to pay because CGT is not payable until the investment is cashed in, while the 30 per cent tax on the dividend is cancelled by the 30 per cent franking credit.

These thoughts came to mind as I was chatting to a cousin who has been widowed for six years, and who is now 75. She had had a long and happy marriage, and her thrifty husband left her some good investments, including a bundle of Commonwealth Bank shares.

When I remarked to her how much she must enjoy the franked dividends, her response came out of left field: “They are great; I use them to buy more CBA shares”.

I responded that dividend reinvestment is a great strategy, but she can still have the money back in cash. She said, “I don’t think you understand. I don’t take the dividends, they’re automatically reinvested, so I get more shares to make compounding work for me.”

I asked her to show me the dividend statement, so I could talk her through the way the system works. The last statement showed that she owned 1,100 CBA shares worth around $115 each. The dividend was $2,365, at $2.15 a share.

Thanks to being a participant in the dividend reinvestment scheme, this $2,365 was used to acquire an additional 20 shares, bringing her total holding to 1,120 shares.

She thought she had me: “I told you I was using the dividend to buy more shares – I’ve now got another 20 of them”. But then I pointed out the notation that there was a franking credit of $1,014. She seemed puzzled by this.

I said, “I’ve got good news for you. The actual dividend is what is used to buy more shares in the bank – the franking is a bonus which you can use to pay your tax, or get a refund if you have no tax to pay.”

We went through all the previous dividend statements and I calculated she had at least $12,000 due to her. After consultation with her accountant, it appears she hasn’t lodged a tax return for years.

By lodging returns, she can claim all those franking credits back. It was a $12,000 windfall, and it made her day.

Noel Whittaker is the co-author of Downsizing Made Simple with fellow finance expert Rachel Lane, available here. Email: [e-mail]

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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