If you receive dividend income through your own share portfolio, a Self Managed Super Fund (SMSF), or on behalf of a not-for-profit organisation, you might be able to claim franking credits. While the concept can seem a little technical at first, understanding how franking credits work may help improve your cash flow, reduce your tax liability, and even strengthen your borrowing capacity when applying for a home or investment loan.
In this guide, Q Financial will explain the basics of franking credits, explore how they may apply to both individuals and not-for-profit organisations, and show you how our mortgage experts can help you make the most of this income stream as part of a well-structured financial strategy.
What Are Franking Credits and Why Do They Matter?
Franking credits (or imputation credits) are a type of tax credit passed on to shareholders when an Australian company pays dividends from profits that have already been taxed. The purpose of these credits is to prevent double taxation, so you’re not taxed again on income that has already been taxed at the company level.
When a company makes a profit, it typically pays tax on that income before distributing the remainder as dividends to shareholders. If those dividends are “franked,” it means they include a credit for the tax that has already been paid by the company.
As a shareholder, you declare both the dividend and the franking credit as income on your tax return, but the credit can then be used to reduce your own tax bill. Depending on your personal tax rate, you may either offset your payable tax or, in some cases, receive a refund.
Who Can Claim Franking Credits in Australia?
Franking credits are available to a broad range of taxpayers and entities in Australia. If you receive dividends from Australian companies, there’s a good chance you may be eligible to claim them, either to reduce your tax payable or receive a refund. Eligibility includes:
- You’re an individual taxpayer receiving dividends from Australian shares.
- You own shares through a trust, company, or partnership, and the income is distributed to you.
- You’re a retiree or low-income earner who receives fully franked dividends.
- You invest through a Self-Managed Super Fund (SMSF), especially if it is in the pension phase.
- You’re a not-for-profit (NFP) organisation that holds tax-exempt status and receives investment income from Australian companies.
In each case, the ability to benefit from franking credits depends on your tax status, the structure through which the income is received, and whether the franking credits have been properly declared in your annual return.
Franking Credits in Practice: A Simple Example
Suppose you receive a fully franked dividend of $700, along with a franking credit of $300. This means the company has already paid $300 in tax on that income at the corporate tax rate of 30%. When lodging your tax return, you would report the full $1,000 as income, but the $300 credit can be used to reduce your own tax bill.
If your personal tax rate is below 30 per cent, you may even receive a refund for the difference. This system is especially useful for retirees, low-income earners, and not-for-profit organisations that often have little or no tax liability but still receive dividend income.
How to Claim Franking Credits on Your Tax Return
Claiming franking credits is a straightforward process when you know what to include and how to report it. Whether you’re an individual, a trust, an SMSF, or a not-for-profit, accurate reporting is key to ensuring you receive the full benefit.
For individuals, trusts, or SMSFs:
To claim franking credits through your annual income tax return, you’ll need to:
- Declare the full dividend amount, including the value of any attached franking credits, as part of your assessable income.
- List the franking credit separately so the ATO can apply it as a tax offset against your total tax payable.
- Lodge your return using myTax (via the ATO’s online services) or work with a registered tax agent to ensure your return is accurate and compliant.
For not-for-profit (NFP) organisations:
The process is a little different for NFPs that are income tax-exempt. To claim a refund of franking credits:
- Confirm that your organisation is eligible to self-assess as income tax exempt.
- Lodge the NFP Self-Review Return by 31 October each year using the ATO’s online platform.
- Report your investment income and franking credits clearly in the return to ensure your refund is processed without delay.
Unsure about eligibility or how to lodge your return correctly? Our mortgage brokers on the Gold Coast work with experienced tax professionals and can guide you through the process with confidence. Contact us today!
Franking Credit Refunds: What You Need to Know
If the value of your franking credits is higher than the amount of tax you owe, you may be eligible to receive a refund for the difference. This often applies to retirees with little or no taxable income, as well as to Self Managed Super Funds in pension phase, where tax obligations are minimal. Not-for-profit organisations that are exempt from income tax may also qualify for refunds on franking credits received through dividend income.
Once your tax return is lodged and processed, the Australian Taxation Office pays the refund directly. For not-for-profits, this involves submitting the NFP Self Review Return. To avoid delays or missed entitlements, it is generally advisable to lodge your return on time and ensure investment income and franking credits are reported accurately to avoid delays. Staying up to date with ATO deadlines is key to making the most of any refundable credits.
Franking Credits for Not-for-Profit Organisations
Not-for-profit organisations can benefit from franking credits, but they must meet specific eligibility and reporting requirements set by the Australian Taxation Office. If your organisation is income tax exempt and receives franked dividends from Australian companies, you may be able to claim a refund of those credits.
To do so, your organisation must:
- Be eligible to self-assess as income tax exempt
- Lodge the Not-for-Profit Self-Review Return via the ATO’s online platform
- Accurately report all investment income and associated franking credits
- Submit the return by 31 October each financial year
The process is relatively straightforward, but accuracy is crucial. Late lodgement or errors in reporting can result in delays or missed refund opportunities. The ATO provides clear guidance, due dates, and online forms to help organisations complete the process with confidence.
Franking Credits and Loan Serviceability
You might be surprised to learn that franking credits and dividend income can actually play a role in your ability to qualify for a home or investment loan. Some lenders, particularly those experienced with investment lending and SMSFs, may include franked dividends as part of your assessable income, provided the income is consistent and well documented.
This can be especially helpful if:
- You’re self-employed and receive dividends alongside business income
- You’re semi-retired or retired and draw income from an Australian share portfolio
- Your SMSF earns regular, franked dividends from listed companies
In these cases, franking credits can enhance your income profile, potentially improving your borrowing capacity. However, not all lenders will treat dividend income the same way, and the supporting documentation must be strong.
A knowledgeable mortgage broker can identify which lenders are open to considering franked dividends and structure your application accordingly. With the right support, you can present a clearer, stronger financial picture that takes full advantage of all your income streams.
Common Mistakes to Avoid
Franking credits can offer real value, but many Australians miss out on their full benefit due to avoidable mistakes. Whether you’re an individual investor, part of a Self Managed Super Fund, or managing a not-for-profit, it’s important to get the details right.
Some of the most common errors include:
- Incorrectly declaring franking credits on your tax return
- Assuming eligibility without confirming your tax status with the ATO
- Lodging the NFP Self-Review Return late, risking delayed or lost refunds
- Providing inconsistent income documentation that lenders may not accept
These details can easily be overlooked, but they can have a real impact on your finances. Understanding the eligibility criteria, reporting obligations, and how franking credits fit into your broader income strategy can help you avoid common mistakes and make better use of your investment income.
Maximise Your Franking Credits with Expert Support
Franking credits may seem technical at first, but as you’ve seen, they can offer meaningful financial advantages. Whether you are looking to reduce your tax bill, increase your cash flow, or strengthen your borrowing capacity, understanding how franking credits work is a valuable step. For individual investors, retirees, Self Managed Super Funds, and not-for-profit organisations, knowing how to claim and structure dividend income properly can make a real difference.
When managed effectively, franking credits can support a more tax-efficient income strategy and strengthen your loan application with the right lender. It all comes down to accurate reporting, consistent documentation, and expert guidance to help you maximise your earnings.
If you’re ready to put your franking credits to work, reach out to Q Financial and take the next step with clarity and confidence.
Frequently Asked Questions (FAQs)
No, foreign investors and non-residents generally cannot claim franking credits. While they may receive fully franked dividends, the franking credit itself is not refundable or offsettable against their Australian tax. However, fully franked dividends are usually exempt from Australian withholding tax, which can still be a benefit.
There is no specific dollar cap on how much you can receive as a refund for franking credits. If your total franking credits exceed your tax liability, the full excess may be refunded to you, depending on your circumstances. This applies to individuals, Self Managed Super Funds (SMSFs), and eligible not-for-profit organisations.
No, a company must have paid Australian income tax to generate franking credits. Franking credits come from a company’s franking account, which tracks the tax it has already paid to the ATO. If a company hasn’t paid tax in Australia, it won’t have franking credits available to attach to its dividends.
Yes, franking credits can still apply if you hold shares through managed funds or exchange-traded funds (ETFs). In most cases, the fund will pass on the franked dividend income and associated franking credits to investors. These details are usually provided in an annual tax statement, which you use when lodging your tax return.
Yes, to be eligible for franking credits, you generally need to hold the shares at risk for a minimum of 45 days, not including the day of purchase or the day of sale. This is known as the 45-day holding rule and is designed to prevent short-term trading solely for the purpose of claiming franking credits. This rule does not apply to individuals whose total franking credits are $5,000 or less in a financial year.
