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Refunding franking credits - individuals

Dividends paid to shareholders by Australian resident companies are taxed under a system known as ‘imputation’. It is called an imputation system because the tax the company pays is imputed, or attributed, to the shareholders. The tax paid by the company is allocated to shareholders by way of franking credits attached to the dividends they receive.

You include an amount equal to the franking credit attached to your dividend in your assessable income. You are also entitled to a franking tax offset equal to the amounts included in your income (there are some exceptions to this rule, see What are the anti-avoidance rules?).

The franking tax offset will cover, or partly cover, the tax payable on the dividends. If the tax offset is more than the tax payable on the dividends, the excess tax offset will be applied to cover, or partly cover, any tax payable on other taxable income received.

If any excess tax offset amount is left over after that, the Tax Office will refund that amount to you.

When is an individual eligible for the refund?

Subject to satisfying certain anti-avoidance rules, resident individuals are eligible for a refund of excess franking credits if:

  • they receive franked dividends, either directly or through a trust or partnership, and
  • their basic tax liability is less than their franking credits after taking into account any other tax offsets to which they are entitled.

What dividends does the refund apply to?

The refund applies to franking credits attached to franked dividends paid to a resident individual on or after 1 July 2000 or, if a resident individual receives franked dividends indirectly through a trust or a partnership, to franking credits attached to franked dividends paid to the trust or partnership on or after 1 July 2000.

Franked dividends are payments made out of profits by an Australian resident company to its shareholders that carry 'franking credits' (that is, the company paid tax on its table income at the rate of 30%).

When resident individuals receive franked dividends directly, they include both the amount of the dividends and the franking credits in their assessable income. Subject to satisfying certain anti-avoidance rules, resident individuals can then claim the franking credits as a franking tax offset. The franking tax offset will reduce their tax liability for the income year from all forms of income, not just from dividend income.

How does it work for individuals that are partners in a partnership or beneficiaries of a trust?

Generally, beneficiaries of a trust who are presently entitled to a part of the trust income that is attributable to franked dividend income and partners of a partnership that has received franked dividend income, are entitled to a tax offset in respect of such income. (There are some exceptions to this rule – see What are the anti-avoidance rules?)

For beneficiaries of a trust:

  • there must always be some positive amount of trust income (as determined under section 95 of the Income Tax Assessment Act 1936) that the beneficiary is presently entitled to for a tax offset to be available, and
  • the tax offset is the portion of the franking credit attached to the franked dividend equivalent to the beneficiary's share of the net trust income attributable to the franked dividend.

For partners of a partnership:

  • a tax offset is available even where the partnership has sustained a loss, and
  • the tax offset is the portion of the franking credit attached to the franked dividend equivalent to the partner's interest in the partnership.

Because both the trust income and partnership income has been 'grossed up' to include the franking credit at the trust and partnership level, it is unnecessary for the individual beneficiary or partner to gross up the amounts received in their own tax return.

What are the anti-avoidance rules?

Resident individuals are not eligible for the tax offset or a refund of excess franking credits if the anti-avoidance rules are triggered. The anti-avoidance rules include the holding period rule and the related payments rule.

The holding period rule applies to shares bought on or after 1 July 1997. It requires the individual to hold the shares 'at risk' for at least 45 days (90 days for preference shares and not counting the day of acquisition or disposal) to be eligible for a tax offset in relation to the franking credit. The holding period rule only needs to be satisfied once for each purchase of shares.

    Note: This rule does not apply if the individual's total franking credits entitlement for the year of income is below $5,000.

The related payments rule applies to arrangements entered into after 7.30pm (Australian Eastern Standard Time) on 31 May 1997. It applies to an individual if they make, are under an obligation to make, or are likely to make, a 'related payment'. A related payment is a payment that passes on the benefit of the franked dividend to someone else.

If the rule applies, and the individual does not hold the shares 'at risk' for a period of 45 days (90 days for preference shares), the individual is prevented from receiving a tax offset in relation to the franking credits. The related payments test must be satisfied for each dividend payment and distribution.

    Note: This rule applies even if the individual’s total franking credits entitlement for the year is below $5,000.

These two rules also apply in relation to beneficiaries of trusts and partners of partnerships.

If you are a partner in a partnership or a beneficiary of a trust, both you and the partnership or trust must satisfy the two rules to be eligible for the franking tax offset or refund of excess franking credits.

Small shareholder exemption

The small shareholder exemption allows you to ignore the holding period rule if all of your franking tax offset entitlements in a given year (whether received directly from a shareholding, or indirectly through a trust or partnership) total less than the maximum franking tax offset ceiling of $5,000.

If you qualify for the small shareholder exemption, you may still be entitled to a franking tax offset (provided that the related payments rule does not apply to you).

If you have a total of less than $5,000 in franking credits (whether from one parcel of shares or from more than one), you are entitled to a franking tax offset in respect of all shares that satisfy the related payments rule. In other words, the holding period rule does not prevent you claiming the franking tax offset in this case.

If you have more than $5,000 in franking credits from a single parcel of shares and did not satisfy the holding period rule in respect of those franking credits, you have no entitlement to a franking tax offset for the entire franking credits. In other words, you cannot claim the small shareholder exemption and restrict your claim of franking credits to a maximum of $5,000. Because you cannot claim a franking tax offset, you do not include the affected franking credits in your assessable income.

If you have a total of more than $5,000 of franking credits from a portfolio of shares made up of several parcels, you are entitled to a franking tax offset only in respect of those shares that satisfy the holding and related payments rules. Therefore, you cannot claim the franking tax offset in respect of any parcels of shares that fail either the holding or the related payments rule. If you cannot claim a tax offset for any dividends, you do not include those franking credits in your assessable income.

How do individuals apply for the refund?

Individuals who are required to lodge an income tax return will use their tax return to claim a refund of franking credits that exceeds their tax payable. They do not have to lodge a separate claim form.

  • For individuals who are not required to lodge a tax return, the refund is available on lodging a form Application for refund of franking credits for individuals. Individuals need to obtain a copy of the publication Refund of franking credits instructions and application for individuals, which contains a claim form and details of how to lodge the claim.

Individuals will need to retain in their records the dividend statements from the company that paid the franked dividend, or the trust or partnership that made the distribution containing the franking credit. These statements should show the amount of the net dividend, the franked amount, unfranked amount and the franking credit, together with the date of payment.

If you have received a dividend that has Australian franking credits attached from a New Zealand company, you may be eligible to claim the Australian franking credits. Further information on claiming Australian franking credits from a New Zealand company can be found in the TaxPack supplement or the Refund of franking credits instructions and application for individuals.

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Last Modified: Tuesday, 30 June 2009



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