Guides / Franking credits
Franking credits and the 45-day rule, explained
Franking credits are one of the best features of investing in Australian shares, and one of the most misunderstood. Here's how they work, when you can't claim them, and how to report them.
What a franking credit is
When an Australian company pays tax on its profits and then pays you a dividend, it can pass on credit for the tax it has already paid. That's the franking credit. A fully franked dividend comes with credits at the company tax rate (usually 30%).
Example: a fully franked $700 dividend from a company paying 30% tax comes with a $300 franking credit.
How it's taxed
- You include the dividend plus the franking credit in your income ($1,000 in the example). This is called "grossing up".
- You're taxed on that at your marginal rate.
- The franking credit ($300) then comes off your tax as an offset.
If your marginal rate is lower than 30%, the credit is worth more than the tax on the dividend. For individuals and super funds, any excess credit is refunded. That's why retirees and low-income investors value franked dividends so highly.
Where it goes in myTax
| 11S | Unfranked amount |
|---|---|
| 11T | Franked amount |
| 11U | Franking credit |
| 13C, 13Q | Franked distributions and the franking credits attached to them, if they came through an ETF or managed fund (from its annual tax statement) |
The 45-day holding period rule
To claim franking credits you must hold the shares "at risk" for at least 45 days (90 days for some preference shares), not counting the day you buy or the day you sell. In practice that means owning them for 47 days. The period runs around the ex-dividend date, so buying just before a dividend and selling straight after won't get you the credit.
Hedging the shares (for example with options) can mean they aren't held at risk for those days.
The small shareholder exemption
If your total franking credits for the year are under $5,000 (around $11,700 of fully franked dividends), the 45-day rule doesn't apply to you at all. Most individual investors fall under this, but active traders and larger portfolios should check.
Common mistakes
- Reporting the cash dividend but forgetting the franking credit (you miss out on the offset).
- Claiming credits on shares bought and sold around the ex-date without meeting the 45-day rule.
- Missing dividends that were reinvested through a DRP: they're still income in the year they were paid.
Let the software do it
Franked works out every dividend from what you held on each ex-date, including franking and DRPs, totals 11S, 11T and 11U for you, and flags any holding that fails the 45-day test when you're over the $5,000 threshold. Free for investors.
General information, not tax advice. Rules can change; check the ATO website or a registered tax agent for your situation.