Understanding Franking Credits in 2025: Definition, Calculation & Tax Benefits

Gordon Scott has been a dedicated investor and technical analyst for over 20 years. He holds the Chartered Market Technician (CMT) designation.

What Are Franking Credits?

Franking credits, also known as imputation credits, are tax credits that corporations distribute to shareholders alongside dividend payments. Originating in Australia and adopted by several other nations, these credits help mitigate the issue of double taxation on corporate earnings.

Since companies pay taxes on their profits before distributing dividends, franking credits allow shareholders to claim a credit for these taxes, reducing their personal tax liabilities or even resulting in refunds, depending on their tax bracket.

How Do Franking Credits Operate?

In countries with franking credit systems like Australia, investors receive these credits not only from direct stock dividends but also from mutual funds holding domestic dividend-paying companies. This system encourages long-term investment in equity markets, particularly among major blue-chip firms, and has driven an increase in dividend distributions.

Franking credits are allocated according to the shareholder's tax rate, ranging from 0% to 30%. Investors in the lowest tax bracket (0%) receive the full credit, equivalent to the tax paid by the company. As tax rates rise, the credit amount declines proportionally, with no credits granted to investors above the 30% tax bracket.

To qualify for franking credits, shareholders must satisfy holding period requirements—in Australia, this is a minimum of 45 days, excluding the purchase and sale dates.

When filing taxes, investors report their dividend income plus the franking credit, known as the grossed-up dividend, which reflects the total taxable amount including the credit.

Key Insights

• Franking credits serve as tax offsets distributed with dividends to shareholders.
• They aim to prevent double taxation on corporate profits in jurisdictions like Australia.
• Shareholders' tax brackets determine the extent of tax benefits or refunds received.
• The system promotes long-term investment and has boosted dividend payouts.

Calculating Franking Credits

The formula to compute franking credits is:

• Franking Credit = (Dividend Amount / (1 - Company Tax Rate)) - Dividend Amount

For example, if an investor receives a $70 dividend from a company taxed at 30%, the franking credit is $30, making a grossed-up dividend of $100.

If the investor qualifies for only 50% of the credit due to their tax situation, the franking credit payout reduces to $15.

Conclusion

Introduced in 1987, franking credits have become a vital tool for encouraging investment in dividend-paying companies, especially benefiting those in lower tax brackets.

As global interest grows, other countries might adopt similar mechanisms to alleviate double taxation, making franking credits a system worth monitoring for investors worldwide.

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