Since their introduction in 1987, franking credits have played a major role in Australia’s tax system, especially for investors and retirees. Yet despite their value, many Australians still find franking credits confusing. 

In this updated guide, we break down exactly how franking credits work, who can benefit from them, and what’s new in 2025, especially if you’re expecting a refund from the ATO. 

What are franking credits? 

Put simply, franking credits are a tax credit system that prevents company profits from being taxed twice, first at the company level and then again when distributed to shareholders as dividends. 

Here’s how it works: 

  • An Australian company earns a profit and pays company tax, usually at 30%. 
  • It then distributes some of those profits to shareholders as dividends. 
  • To avoid double taxation, the company attaches franking credits to those dividends. These credits reflect the tax the company has already paid. 
  • Shareholders then use the franking credits to reduce their personal income tax. If the credits exceed the tax owed, they may receive a refund. 

This system makes dividend income more valuable, especially for lower-income investors or retirees. 

How are franking credits calculated? 

The franking credit attached to a dividend is calculated based on the company tax rate and the dividend amount. 

Franking Credit Formula: 
Franking Credit = Dividend x (Tax Rate / (1 – Tax Rate)) 

Example: 
If a company pays a $0.70 dividend and the tax rate is 30%: 
$0.70 x (0.30 / (1 – 0.30)) = $0.30 
So, a $0.70 dividend would carry a $0.30 franking credit. 

How Franking Credits Work: Example 

Let’s say Jenny receives a fully franked dividend of $700 with $300 in franking credits. 

  • Jenny includes the total $1,000 (dividend + credit) in her taxable income. 
  • At a 30% marginal tax rate, she owes $300 in tax on that $1,000. 
  • But because she has $300 in franking credits, her tax is offset completely, making that income tax-free. 

If Jenny’s tax rate was below 30%, she could even receive a refund of the unused credits. 

What are the benefits of franking credits? 

Franking credits can offer several benefits, including: 

  • Preventing double taxation 
  • Increasing after-tax income from dividend-paying shares 
  • Reducing or eliminating personal income tax 
  • Providing potential tax refunds (especially for low-income earners or retirees) 

They are particularly valuable for self-funded retirees, individuals in lower tax brackets, and self-managed super funds (SMSFs). 

2025 ATO Automatic Refunds: What You Need to Know 

From 2025, the ATO will automatically refund franking credits to eligible individuals over 60, provided they meet all the criteria. No application is needed. 

Eligibility Criteria: 

You must: 

  • Be 60 or older as of 30 June 2025 
  • Be a full-year Australian tax resident for 2024–25 
  • Receive $18,200 or less in dividend income 
  • Have held the shares for at least two years 
  • Have franking credits totalling $5,460 or less 
  • Not be represented by a tax agent 
  • Have no additional tax liabilities (e.g., property or capital gains) 
  • Have current bank and contact details registered with the ATO 

If eligible, the ATO will notify you in June and issue the refund automatically from mid-July, with most payments processed by August. 

You can opt out by calling the ATO. 

Applying for a Franking Credit Refund (If Not Automatically Processed) 

If you don’t qualify for automatic processing, you can still apply manually from 1 July 2025 via: 

  • myGov or ATO Online (preferred) 
  • Phone application 
  • Postal form (NAT 4105) 

Most dividend information is pre-filled by late July, so waiting to apply can speed up your refund. 

Why Wait Until Late July to Apply? 

While you can apply from 1 July, we recommend waiting until the ATO pre-fills your dividend information, typically by mid to late July. This reduces errors, avoids amendments, and helps you receive your refund faster. 

Why Are Franking Credits Controversial? 

While franking credits benefit many investors, critics argue they disproportionately favour retirees and wealthier shareholders, potentially straining government revenue and creating tax inequalities. 

Concerns include: 

  • Complexity in tracking and claiming 
  • Risk of future policy changes affecting eligibility or refundability 

Frequently Asked Questions (FAQ) 

What are franking credits? 
Franking credits are tax credits that offset the tax already paid by companies, helping investors avoid double taxation on dividends. 

Who is eligible for a franking credit refund? 
Any shareholder whose franking credits exceed their tax payable may be eligible for a refund, subject to ATO rules and eligibility. 

How do I apply for a refund? 
Use myGov, call the ATO, or submit Form NAT 4105. Waiting until late July helps ensure pre-filled data is accurate. 

What’s new for 2025? 
The ATO will now automatically refund franking credits to eligible individuals over 60 who meet strict conditions. No application is required. 

Still Have Questions About Franking Credits? Davidsons Can Help. 

Imputation credits can significantly improve your after-tax income, but only if used strategically. For expert advice tailored to your situation, contact the Davidsons team by completing an enquiry form, calling us on 03 5221 6399 or emailing via info@davidsons.com.au. 

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This article was written by Tax and Business Services Manager, Michael Rebula.  

Disclaimer: The information provided in this article is factual in nature and objectively ascertainable and, therefore, does not constitute financial product advice. Importantly, the factual information that has been supplied does not take into account your personal circumstances, objectives or goals.