Dividend franking: How it works, why it benefits investors and retirees
Dividend income is a key attraction for many share investors. Franking credits can also deliver tax benefits, particularly for retirees.
Investing in shares has delivered Australians strong capital growth over many decades, but for many it’s the rising dividend income that is the real attraction.
Most major companies pay dividends to shareholders every six months. They’re paid from company profits. It’s similar to bank interest in that it can provide a regular flow of cash, albeit with some volatility in line with profits rising and falling. It comes with a couple of key benefits.
First, as inflation and business profits grow, the size of the company’s dividends rise too if it maintains its payout ratio at a similar level.
A good example of this is iron ore miner Fortescue. Its profits have surged over the past decade as it shifted from building expensive iron ore mines in the Pilbara to exporting the key steelmaking ingredient to Chinese customers. Over the past decade, its annual dividend-per-share payout has grown from 5c in 2015 to $1.39 last financial year (and in 2021 it paid a dividend of $2.11). That’s a huge return on an initial outlay for an investor who bought Fortescue shares 10 years ago.
If you bought 10,000 shares back then you’d have received a half-year and full-year dividend cheque totalling $500.Last year financial year you’d have collected $13,900(and also enjoyed huge capital gains on the share price growth).
If you think that’s a lot, well, Fortescue founder Andrew Forrest and his family have received dividend cheques amounting to more than $14bn since the miner paid its first dividend in 2011, and also received the benefits of franking.
The franking of dividends gives shareholders a tax credit for the tax the company already has paid on its profits. Most businesses pay company tax at 30c in the dollar, the same as the tax rate paid by average workers in Australia.
That means a typical wage earner effectively gets their dividends tax-free, unlike bank deposits that are taxed at people’s marginal tax rate. A higher-income earner gets a tax credit of 30c in the dollar, while a retiree who doesn’t pay tax actually gets the franking credit refunded to them on top of their dividend.
Fully franked v partially franked
While a majority of companies pay fully franked dividends, some pay partially franked dividends or unfranked dividends. This is because they have not paid the full rate of company tax on the profits they distribute to shareholders. For unfranked dividends, investors must pay tax on the full amount of that dividend at their marginal tax rate.
How it impacts your tax
Franked dividends come with franking credits for the tax paid at corporate level.
You report both when you’re filing your tax return.
Australia’s biggest online stockbroker, CommSec, provides this example.
Consider someone who receives a $1400 fully franked dividend with a $600 franking credit attached. They would report both the $1400 income and the $600 franking credit, resulting in $2000 of assessable income.
Someone on a marginal tax rate of 37 per cent could expect to owe $740 on that $2000, but the franking credit reduces the tax liability to $140.
For an investor on the 30 per cent marginal tax rate, there is zero tax to pay on the fully franked dividend, while an investor on a 45 per cent marginal tax rate still pays an effective 15 per cent tax on the dividend they receive because their tax rate is higher than the company tax rate.
To get franking credits, investors generally need to have held the share for 45 days.
Great for retirees
Fully franked dividends are popular with retirees who do not pay income tax, such as those with their nest egg sitting in an account-based pension that pays zero tax on income and capital gains.
They get the full benefit of dividend franking because the franking credit gets refunded to them. So a $70 dividend would also come with a $30 tax refund – turbocharging their income.
This mechanism means that every $1000 of dividends received by a retiree who pays no tax or has an account-based pension comes with a $428.57 franking credit, giving them $1428.57 of total income.
Will the government target them?
In 2019, Labor’s Bill Shorten and Chris Bowen tried to scrap franking credit refunds for retirees, and this was viewed as a key reason why they lost the federal election to Scott Morrison (alongside proposed changes to negative gearing).
In the 2025 election, Labor kept clear of the franking credits debate. However, it is under pressure to lift taxes to fund its big spending programs and, with a weakened opposition, there’s a chance franking credits could reappear in public debate.
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