Franking Credits
Updated on March 18, 2025
Reviewed By
Febb Borje, a tax professional with 11 years of expat tax experience, specializes in US tax preparation, tax planning, and tax advice for US citizens and Green Card holders living and working in Australia.
*30-minutes US$347.
Table of Contents
What are franking credits in Australia?
Franking credits are a feature of the Australian tax system that is designed to prevent the double taxation of after-tax dividends received by Australian shareholders.
When an Australian company pays tax on its profits and then subsequently distributes those profits as dividends, it can attach franking credits to these dividends, reflecting the tax already paid. Their role is for shareholders to use these credits to reduce their own tax payable, ensuring that the income is not taxed twice. The basic definition of franked dividends is after-tax dividends.
How do franking credits work?
When a shareholder receives a franked dividend of AUD$100, it usually includes both the dividend of AUD$70 and the attached franking credit of AUD$30. The franking credit can then be used to offset the tax liability on your tax return. If the franking credit exceeds the tax payable, the excess may be refunded directly to you.
Corporate tax rates are generally 25% and 30%, and the rate essentially depends on the size of the company.
Though not all businesses pay franked dividends, it’s important to know whether your dividends are fully, partially, or not.
Are after-tax dividends fully franked?
If a dividend is considered fully franked, that means that the company has already paid the 30% tax rate. In that case, if your personal tax rate is 30% or less, that dividend income is essentially tax-free.
But what if your personal tax rate is above 30%? If you received AUD$1000 worth of fully franked dividends. Those dividends will have already been subject to AUD$300 in tax, so you will only need to make up the difference between that and whatever your personal tax rate is.
Some taxpayers perceive that as partially franked dividends but partially franked and unfranked dividends are something else entirely. This is just a requirement for top-up tax over and above the franking credit.
So, if your tax rate is 40%, you will only have to pay 10% in tax on that dividend income. But on the flip side, if your personal tax rate is only 19%, you may even receive a refund.
Are US-citizen shareholders eligible for franking credits?
US citizen shareholders are generally not entitled to claim a foreign tax credit for franking credits because the US tax system does not recognize the tax as being paid by the individual. There is no such thing in the IRS. But the good news is instead of reporting the whole dividend amount with the attached franking credit, you only need to report the amount you only received as dividends, so essentially, the franking credits are ignored.
For example, if the company generated AUD$100 of profits and paid AUD$30 in tax on them, you will receive AUD$70 in total. The amount reported as income in your Australian return is the full AUD$100 dividends, so you can claim the franking credits for the AUD$30.
Since the IRS ignores the franking credits, you will only report the AUD$70 (USD equivalent) on your US tax return as you are not deemed to have received the AUD$30 tax paid by the corporation.
Still confused on how franking credits work? Talk to an accountant today.
How are franking credits calculated?
The amount of franking credits attached to a dividend will depend on the company’s tax rate and the proportion of profits being distributed. The formula to calculate franking credits is:
Franking Credits = (Dividend Amount × Company Tax Rate) / (1 – Company Tax Rate)
For example, if a company with a tax rate of 30% pays a US$70 dividend:
Franking Credits = (US$70 × 0.30) / (1 – 0.30) = US$30
Therefore, the shareholder receives a US$70 dividend with US$30 in franking credits.
Do I have to pay tax on Australian dividends in both countries?
Since you need to report worldwide income on your US tax return, this includes the franked dividends which are subject to US taxation. However, the US-Australia tax treaty helps avoid double taxation through the Foreign Tax Credit (FTC) or the Foreign Earned Income Exclusion (FEIE), depending on your situation.
How are Australian dividends reported on a US tax return?
You will be required to report your dividends on both your Schedule B and your FATCA form. Additionally, you can file Form 1116 (Foreign Tax Credit) if foreign taxes were paid. If you have an Australian brokerage account, you may also need to report it on FBAR (FinCEN Form 114).
Should I avoid Australian dividend stocks altogether?
Not necessarily, but it’s also good to be aware of the tax inefficiencies. Since you cannot benefit from franking credits and may face double taxation risks, there are other investments aligned with US tax advantages.
