What Are Franking Credits?
When an Australian company pays tax on its profits (25-30%), it can pass those tax credits to shareholders as franking credits attached to dividends. You include both the dividend and the franking credit in your taxable income, then receive a tax offset for the franking credit. If your tax rate is lower than the company tax rate, you get a refund. This system prevents double-taxation of company profits.
Example
A fully franked $700 dividend from a company that paid 30% tax: gross-up = $700 + $300 franking credit = $1,000 taxable income. If your marginal tax rate is 32.5%, tax on $1,000 = $325. Minus $300 franking credit = only $25 additional tax. If you earn under the tax-free threshold, you get the full $300 franking credit as a cash refund from the ATO. This makes Australian shares extremely tax-efficient for low-income earners, retirees, and super funds.
Strategy
Hold Australian dividend-paying shares in your lowest-taxed entity (personal name if low income, super fund at 15% tax, or distribute through a family trust to low-income beneficiaries). Companies with consistently high franking: big banks (CBA, ANZ, WBC, NAB), Telstra, BHP, Woodside. Franking credits are one of Australia's most powerful wealth-building tools — especially inside super where they can result in effective 0% tax on dividends.