Dividend investing is popular in Australia for a reason that doesn't exist anywhere else in the world: the franking credit system. Introduced in 1987, this system means Australian investors can often receive a tax credit on top of their dividend cash payment — effectively getting a refund for tax the company has already paid on your behalf. Understanding how this works can significantly boost your actual investment returns.
Try it: Use our Dividend Income Calculator to estimate your annual dividend income, gross-up for franking credits, and after-tax return based on your marginal tax rate.
What Is Dividend Investing?
When you own shares in a company, you own a portion of that business. Many companies distribute a share of their profits to shareholders as dividends — usually paid twice a year (interim and final dividend). Dividend investing is a strategy focused on building a portfolio of shares that generates a reliable income stream, rather than (or in addition to) seeking capital growth.
The appeal is clear: with enough capital invested in quality dividend-paying shares, you can generate meaningful passive income without selling any assets.
Franking Credits Explained
Before 1987, company profits were taxed twice: once at the corporate rate when the company earned them, and again at the individual's marginal rate when they received the dividend. The franking credit (dividend imputation) system was introduced to eliminate this double taxation.
Here's how it works: if a company pays 30 cents in tax for every dollar of profit (Australia's standard corporate tax rate), it attaches a "franking credit" to the dividend representing the tax already paid. When you lodge your tax return, you include the cash dividend plus the franking credit as income — but you then receive a tax offset equal to the franking credit amount.
Franking Credit = (Dividend Amount ÷ (1 − Company Tax Rate)) × Company Tax Rate- Dividend Amount = the cash dividend received
- Company Tax Rate = 30% for large companies, 25% for base rate entities
- Grossed-Up Dividend = Dividend + Franking Credit (this is the taxable amount)
Example: $700 fully franked dividend from a large company
- Cash dividend received: $700
- Franking credit = $700 ÷ 0.70 × 0.30 = $300
- Grossed-up dividend (taxable income): $700 + $300 = $1,000
The company paid $300 in tax on the $1,000 of profit. You receive $700 cash plus a $300 tax credit.
- If your marginal rate is 32.5%: tax on $1,000 = $325. After $300 credit, you pay $25 extra tax.
- If your marginal rate is 19%: tax on $1,000 = $190. After $300 credit, you receive a $110 refund.
- If your marginal rate is 0% (e.g., retiree): After $300 credit, you receive a $300 refund.
Fully Franked vs. Partially Franked vs. Unfranked
Not all dividends carry full franking credits. The level of franking depends on how much tax the company has already paid on the relevant profits:
| Franking Level | What It Means | Common Examples |
|---|---|---|
| Fully franked (100%) | Company has paid full 30% tax on all profits distributed | Most major Australian banks, large retailers |
| Partially franked | Only some profits have been taxed at the full rate | Companies with international operations or tax concessions |
| Unfranked (0%) | No franking credits attached | REITs (which pass through rental income), some international-focused companies |
The After-Tax Value of Franking Credits at Different Tax Rates
| Marginal Tax Rate | Effective Tax on $1,000 Grossed-Up (after credit) | Net Return on $700 cash dividend |
|---|---|---|
| 0% (e.g., super in pension phase) | Refund of $300 | $1,000 (143% of cash dividend) |
| 19% (income $18,201–$45,000) | Pay $190, get $300 credit = net refund $110 | $810 (115.7% of cash dividend) |
| 32.5% (income $45,001–$120,000) | Pay $325, get $300 credit = net $25 extra tax | $675 (96.4% of cash dividend) |
| 37% (income $120,001–$180,000) | Pay $370, get $300 credit = net $70 extra tax | $630 (90% of cash dividend) |
| 45% (income over $180,000) | Pay $450, get $300 credit = net $150 extra tax | $550 (78.6% of cash dividend) |
This table illustrates why dividend investing with franked shares is particularly powerful for low-to-middle-income earners, retirees drawing from superannuation, and self-managed super funds (SMSFs) in pension phase (where the 0% tax rate applies and the full franking credit comes back as a cash refund).
Dividend Yield and Grossed-Up Yield
When comparing dividend-paying shares, it's important to look at the grossed-up yield rather than just the nominal dividend yield, because it reflects the true pre-tax return including franking credits.
Grossed-Up Yield = Dividend Yield × (1 ÷ (1 − Company Tax Rate))- For a 30% tax rate: Grossed-Up Yield = Dividend Yield × 1.4286
- A 5% fully franked yield is equivalent to a grossed-up yield of 7.14%
Dividend Reinvestment Plans (DRPs)
Many ASX-listed companies offer a Dividend Reinvestment Plan, allowing you to automatically reinvest your dividend cash payments into additional shares instead of receiving the cash. Key points for Australian investors:
- DRP shares are usually issued at a small discount (typically 1–2.5%) to the market price
- Each DRP parcel creates a new tax cost base entry — important for future CGT calculations
- You still receive (and must declare) the franking credits even when reinvesting
- DRPs are excellent for compounding returns over long time horizons, but add tax record-keeping complexity
Building a Dividend Income Stream
How much capital do you need to generate meaningful passive income through dividends? Using a conservative grossed-up yield of 6% (achievable from a diversified portfolio of large-cap ASX shares):
| Portfolio Value | Annual Dividend Income (cash) | Grossed-Up Income (incl. franking) |
|---|---|---|
| $100,000 | ~$4,200 | ~$6,000 |
| $250,000 | ~$10,500 | ~$15,000 |
| $500,000 | ~$21,000 | ~$30,000 |
| $1,000,000 | ~$42,000 | ~$60,000 |
Risks of Dividend Investing
Dividend investing is not risk-free. Key risks include:
- Dividend cuts: Companies can and do reduce or cancel dividends during economic downturns. Many Australian banks cut dividends significantly in 2020.
- Concentration risk: Chasing high yields can lead to over-concentration in a few sectors (e.g., banks and miners dominate ASX high-yield lists).
- Yield trap: A very high yield can signal that the market expects the dividend to be cut. A 12% yield on a declining company is not necessarily good value.
- Tax changes: The franking credit system has been politically debated. Policy changes could affect the value of credits.
Frequently Asked Questions
Do I need to do anything special to claim franking credits?
No, provided you lodge an Australian tax return. Your broker will issue a tax statement each year showing your dividends and franking credits. Enter these in your tax return and the ATO will apply the credits automatically (or issue a refund if your credits exceed your tax liability).
Can I access Australian dividend shares through super?
Yes. Most superannuation funds invest in Australian shares and pass franking credits through to members. SMSFs in pension phase receive the maximum benefit as described above. If you want direct control over which dividend shares you hold, an SMSF is one option, though the administrative overhead only becomes cost-effective at around $250,000 or more in assets.
Are international shares eligible for franking credits?
No. Franking credits only apply to Australian companies that have paid Australian corporate tax. Dividends from international shares (US, UK, European companies etc.) are paid without franking credits and may have withholding tax deducted at the source country, though tax treaties often reduce this rate.