Understanding how franking credits work in superannuation compared to personal accounts helps clarify why account structuring conversations often arise around Australian equities and dividend-focused strategies.
Key takeaway
Franking credits are more valuable in low-tax environments. Superannuation funds (particularly in pension phase) can often use or receive refunds of excess franking credits. The optimal placement of franked shares depends on each investor's tax position in both their personal and super accounts.
This is general educational content, not personal financial advice or tax advice. Individual tax circumstances vary significantly. Consult a registered financial adviser and tax agent for advice specific to your situation.
Brief Recap: How Franking Credits Work#
When an Australian company pays company tax (at 30% for large companies, 25% for some small companies) on its profits, it accumulates franking credits. When it pays a fully franked dividend, it attaches those credits to the dividend.
Shareholders gross up the dividend by the credit and include both in assessable income. The credit offsets their personal or entity-level tax liability. If the credit exceeds the tax, the excess may be refunded.¹
The key insight is: the lower your tax rate, the more of the franking credit is "left over" after covering your liability, which may be refundable.
Franking Credits in a Personal Account#
For an investor holding Australian shares personally:
- Dividend income (grossed up by the franking credit) is taxed at their marginal rate.
- The franking credit offsets that tax.
- If the marginal rate exceeds the company tax rate, the investor still pays the difference.
- If the marginal rate is below the company tax rate (possible for low-income investors), the excess may be refunded.
Example: High-income earner (47% marginal rate)
Company tax paid: 30% on $100 profit = $70 paid as dividend + $30 franking credit.
Grossed-up income: $100. Tax at 47% = $47.
Franking credit applied: $47 − $30 = $17 still payable.
Result: net tax of $17, effectively paying the difference between 47% and 30%.
Example: Low-income earner (19% marginal rate)
Tax on $100 grossed-up income at 19% = $19.
Franking credit of $30 applied: $19 − $30 = −$11.
Result: $11 refund of excess franking credit.
In a personal account, the value of a franking credit is the tax rate differential: how much of the credit offsets tax versus how much may be refunded.
Franking Credits in Superannuation (Accumulation Phase)#
Superannuation funds in accumulation phase pay 15% on investment income. This is significantly lower than most individuals' marginal rates.
Using the same example:
Company pays $100 in profit, $30 tax, distributes $70 + $30 franking credit.
Super fund assessable income: $100. Tax at 15% = $15.
Franking credit of $30 applied: $15 − $30 = −$15.
Result: $15 refund to the super fund.
The super fund's effective tax rate on that income is zero, and it receives a cash refund of the $15 excess. This makes franking credits particularly efficient inside super.²
For the individual, any excess franking credits are retained by the fund and reduce its overall tax liability. The practical effect is that a super fund with substantial Australian equity holdings and large franking credits often has very low or zero tax on its investment income.
Franking Credits in Superannuation (Pension Phase)#
A superannuation fund in pension phase (paying retirement income) is generally exempt from tax on investment income. The tax rate on earnings in pension phase is 0%.³
With a 0% tax rate:
Tax on $100 grossed-up income at 0% = $0.
Franking credit of $30: fully refundable.
Result: the entire $30 franking credit is returned to the fund as cash.
This is the most efficient use of franking credits from a pure tax perspective: the entity receiving them is not paying any tax on the income, so every dollar of franking credit is a cash refund.
Self-managed superannuation funds (SMSFs) in pension phase are the most commonly discussed case, but the same principle applies to retail and industry funds in pension phase (though how efficiently individual members benefit depends on the fund's pooling and tax management).
Comparing the Outcomes#
The table below illustrates the tax outcome on $100 of company profit paid as a fully franked dividend, across different entities:
| Investor | Tax Rate | Grossed-Up Income | Franking Credit | Tax Payable | Cash After Tax |
|---|---|---|---|---|---|
| High-income personal (47%) | 47% | $100 | $30 | $47 − $30 = $17 | $70 − $17 = $53 |
| Medium-income personal (32.5%) | 32.5% | $100 | $30 | $32.50 − $30 = $2.50 | $70 − $2.50 = $67.50 |
| Low-income personal (0%) | 0% | $100 | $30 | $0 − $30 = −$30 refund | $70 + $30 = $100 |
| Super (accumulation, 15%) | 15% | $100 | $30 | $15 − $30 = −$15 refund | $70 + $15 = $85 |
| Super (pension, 0%) | 0% | $100 | $30 | $0 − $30 = −$30 refund | $70 + $30 = $100 |
Note: this table is illustrative and simplifies several real-world factors including Medicare levy, super contributions tax, and other income interactions.
Structuring Implications#
The difference in franking credit efficiency between accounts is one reason why asset location (choosing which assets to hold in which account) is discussed in financial planning.
Holding Australian equities with high franking yield inside super (particularly pension phase) can be more tax-efficient than holding the same assets personally. However, asset location decisions involve many other factors:
- Contribution caps: the amount you can contribute to super is limited, so you cannot simply move all assets into super.
- Liquidity and access: super generally cannot be accessed before preservation age without meeting a condition of release.
- Asset allocation: holding Australian equities in super purely for franking may create concentration risk if other super assets also favour Australian equities.
- Diversification: international equities, fixed income, and other assets are also important and may be more efficiently held personally or in other structures in certain cases.
Asset location is a secondary optimisation. It should not override primary decisions about asset allocation, insurance, savings rate, and risk management.
What Has Not Changed (and What Has)#
There was significant debate in Australia during 2018-2019 about the franking credit refund policy, with proposals to limit cash refunds for certain entities. The refund policy remained in place following the 2019 election outcome. As of the date of this article, the current rules allow excess franking credit refunds for eligible entities including self-managed super funds and individuals.⁴
However, tax law can change. Anyone making decisions that heavily rely on a specific treatment of franking credits should factor the risk of policy change into their planning.
Summary#
Franking credits reduce tax liability and may be refunded when they exceed the entity's tax liability. Super funds in accumulation phase (taxed at 15%) often receive partial refunds; those in pension phase (taxed at 0%) often receive the full franking credit as cash. High-income individuals receive less benefit from franking credits, while low-income individuals and some retirees receive greater benefit. The difference in franking credit efficiency between account types is one input into asset location decisions, but it is one factor among many and should not drive investment decisions independently of broader planning considerations.
Sources#
- Australian Taxation Office. (2024). Dividend imputation. https://www.ato.gov.au/businesses-and-organisations/corporate-tax-measures-and-dividend-imputation
- Australian Taxation Office. (2024). Franking credits for superannuation funds. https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/super/growing-and-keeping-track-of-your-super/franking-credits
- Australian Taxation Office. (2024). Tax on super payments. https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/super/withdrawing-and-using-your-super/tax-on-super-payments
- Australian Taxation Office. (2024). Refund of franking credits. https://www.ato.gov.au/individuals-and-families/financial-investments/in-detail/refund-of-franking-credits-instructions-and-application