A franking credit (also called an imputation credit) is a tax credit attached to dividends paid by Australian and New Zealand companies. It represents company tax already paid on the profits being distributed. Under dividend imputation, shareholders are not taxed twice on the same earnings: they receive credit for the corporate tax.
When a company pays a fully franked dividend, it attaches credits reflecting the corporate tax rate (commonly 30%, or 25% for base-rate entities). The shareholder declares the grossed-up dividend as income and then offsets the franking credit against their personal tax bill; in Australia excess credits can even be refunded.
Example: a company pays a AUD 700 fully franked dividend having already paid 30% tax. The attached franking credit is AUD 300, so the shareholder reports AUD 1,000 of grossed-up income. A shareholder on a 32.5% marginal rate owes AUD 325, offsets the AUD 300 credit, and pays just AUD 25 net.
- Credit reflects company tax paid (often 30%)
- Dividend is grossed up for the credit
- Excess credits may be refundable
Explore how business profits are taxed elsewhere via the QBI deduction or Germany's Gewerbesteuer.