How Are Dividends Taxed in Australia? (Franking Credits Explained)
Learn how dividends are taxed in Australia, how franking credits work, and what to declare, with a plain-English worked example for share investors.
By Timothy Hirou GaschereauPublished 11 min read
That quarterly dividend landing in your account feels pretty good, almost like the market is handing you a gift. The ATO sees it a little differently. If you have ever wondered how dividends are taxed in Australia, you are in the right place, and the rules are more generous than you might expect once franking credits enter the picture.
This guide covers the full picture: what counts as dividend income, how the franking credit system works, what happens when you reinvest, and what you actually do at tax time, with minimal jargon. It is general information only, not tax advice, so check the ATO or a registered tax agent for your situation.
🎯 The essential: Dividends are assessable income, taxed at your marginal rate (and separate from capital gains). Franked dividends carry a franking credit for the company tax already paid: you gross up (declare the cash PLUS the credit) then claim the credit as an offset. If your marginal rate is below the company rate, you get a cash refund of the excess. Reinvested (DRP) dividends are still taxable. Most of this is pre-filled, but check it.
Dividends are income: declare them all
The basic rule: dividends are assessable income. Every dividend you receive must be declared in the year it is paid or credited, added on top of your other income and taxed at your marginal rate. In the 30% bracket, dividends are effectively taxed at 30%; in the top bracket, at 47% (45% plus the 2% Medicare levy).
Dividends and capital gains are separate. Capital gains tax only applies when you SELL shares; simply holding them and receiving dividends does not trigger CGT. And note: dividends reinvested through a DRP are still taxable income in the year, even though you got shares instead of cash.
Franking credits and the gross-up
This is where the Australian system gets genuinely generous. An Australian company pays company tax (30%, or 25% for base rate entities) on its profits before paying dividends. Without special rules, shareholders would then be taxed again on that already-taxed profit: double taxation. The dividend imputation system fixes this: a franked dividend comes with a franking credit representing the tax already paid on your behalf.
The mechanism, in plain English: you declare the grossed-up amount (cash dividend plus the franking credit), then claim a tax offset equal to the credit. The net effect is that you are only taxed on the difference between your marginal rate and the company tax rate already paid. Lower rate than the company, and you get money back; higher, and you pay the difference; the same, and you pay nothing extra.
Franked vs unfranked, and refunds for low brackets
- Fully franked: the maximum franking credit, common for large profitable Australian companies.
- Partially franked: some credit, but not the full amount (for example, when some profit came from overseas).
- Unfranked: no credit; simply taxed at your marginal rate with no offset.
Foreign dividends generally carry no Australian franking credit, but may have had foreign withholding tax deducted (a foreign income tax offset may apply). And the distinctive bit: if your franking credit exceeds the tax you owe on the grossed-up dividend, the excess is refunded to you as cash. That is especially valuable for retirees, low-income earners, and SMSFs in pension phase (0% tax).
Worked example: a $70 fully franked dividend
Say you receive a $70 fully franked dividend from a company paying 30% company tax. The franking credit is $30, so your grossed-up income is $100. You declare $100 and claim a $30 offset. The outcome depends on your marginal rate:
| Marginal rate | Tax on $100 grossed-up | Less $30 credit | Result |
|---|---|---|---|
| ~16% (low bracket) | ~$16 | $30 | About $14 refunded to you |
| 30% | $30 | $30 | $0 extra to pay |
| 47% (top, incl. Medicare) | ~$47 | $30 | About $17 to pay |
The 45-day rule, DRPs, and foreign dividends
- The 45-day rule: to claim franking credits you generally must hold the shares “at risk” for at least 45 days (90 for preference shares), not counting the buy and sell days. But if your total franking credits for the year are $5,000 or less, you are generally exempt, which covers most everyday investors.
- DRPs are still taxable: a reinvested dividend is income in the year, and each reinvestment is a new CGT parcel with its own cost base and date, so keep the records.
- Foreign dividends: no Australian franking credit, possible foreign withholding tax and a foreign income tax offset. Keep statements organised and get advice if you hold international shares.
Declaring dividends and keeping records
The good news: most dividend and franking credit information is pre-filled in your myTax return by the ATO. The caveat: pre-filled data is not always complete or correct (companies sometimes lodge late), so always check it against your own dividend statements before you lodge. Keep dividend statements, DRP confirmations, purchase and sale dates, and any foreign tax withheld, generally for five years. New to the process? Our guide to lodging your tax return walks through it.
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❓ Frequently asked questions
How are dividends taxed in Australia?
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Dividends are assessable income, added to your total taxable income and taxed at your marginal rate. If the dividend is franked, you also include the attached franking credit in your income, then claim that credit as a tax offset, which reduces or eliminates the tax on the dividend. The ATO pre-fills most dividend information, but check it against your own statements.
What is a franking credit?
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A franking credit (or imputation credit) represents the company tax already paid by an Australian company on the profits it distributes as a dividend. You get a credit for that tax to offset your own income tax, and if the credit exceeds your tax, the excess is refunded to you as cash.
Do I pay tax on reinvested dividends (DRP)?
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Yes. Even though you received shares instead of cash, a DRP dividend is taxable income in the year it is paid or credited. You declare the full grossed-up amount just as you would for a cash dividend, and each reinvestment also creates a new CGT parcel, so keep records.
Can I get a refund of franking credits?
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Yes, if your franking credit exceeds the tax you owe on the grossed-up dividend, which happens when your marginal rate is lower than the company tax rate already paid. The ATO refunds the excess to you as cash. This is a distinctive feature of Australia's imputation system, valuable for retirees and low-income earners.
What is the difference between franked and unfranked dividends?
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A fully franked dividend carries the maximum franking credit (based on the company tax rate). A partially franked dividend carries some credit but not the full amount. An unfranked dividend carries no credit and is simply taxed at your marginal rate with no offset. Large, profitable Australian companies often pay fully franked dividends.
What is the 45-day holding rule?
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To claim franking credits you generally must hold the shares 'at risk' for at least 45 days (not counting the buy and sell days); for preference shares it is 90 days. It stops people buying shares just to capture a credit and selling immediately. But if your total franking credits for the year are $5,000 or less, you are generally exempt. Check the ATO for detail.
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Sources
This article is general information only, not tax or financial advice. Dividend and franking rules and tax rates are set by the ATO and can change. Check the ATO or a registered tax agent for guidance specific to your situation.
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General information only. This article is educational and does not constitute personal financial advice. It does not account for your circumstances. Consider your own situation and seek advice from a licensed adviser before acting. Read our full disclaimer.
Timothy Hirou Gaschereau
Founder of Snowball Invest, not a financial adviser.
I write about what I'm learning myself, because nobody ever taught us how to take control of our own money. It's a skill, not a mystery, and it's never too late to learn it. The best day to start was yesterday, the second best is today.
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