What Is a Franking Account and How Does It Work?

A franking account is the notional tax ledger every eligible Australian company keeps to record the income tax it has paid, so that the same profit is not taxed twice when it later reaches shareholders. When the company pays tax, the ledger goes up. When the company attaches those paid-tax amounts as franking credits to a dividend, the ledger goes down and the credit travels to the shareholder, who uses it against their own tax bill. The account holds no cash. It is a scorecard, and the Australian Taxation Office checks that the score adds up.¹

Which Entities Keep One

Any corporate tax entity that is an Australian resident for tax purposes must maintain a franking account. That covers companies, corporate limited partnerships, and public trading trusts. It does not cover mutual life insurance companies or companies acting solely as trustees of a trust.¹

New Zealand resident companies can elect into the Australian imputation system and, once they do, keep a franking account under broadly the same rules.²

What Increases the Balance

The balance rises through franking credits. The most common source is the company paying its own income tax, either as a lump sum or through PAYG instalments across the year. The credit equals the tax paid and is dated to the day the payment is made.¹

Receiving a franked dividend from another Australian company also generates a credit: the credits attached to that incoming dividend flow into the recipient’s own account. Paying franking deficit tax (see below) generates a matching credit as well, since the payment itself makes the ledger whole.¹

What Reduces the Balance

The balance falls through franking debits. The main debit is paying a franked dividend: the credits attached to that dividend leave the company’s ledger and travel with the payment to shareholders. Receiving an income tax refund from the ATO also triggers a debit equal to the refund, reversing the credit created by the original payment.¹

Off-market share buy-backs by listed public companies can also produce a franking debit, calculated as though the purchase price were a frankable distribution franked at the company’s benchmark percentage.³

How Much Credit Attaches to a Dividend

The credit a company can attach to each dollar of dividend depends on its corporate tax rate for imputation purposes. Since the 2021–22 income year, two rates apply:

25% for base rate entities, meaning companies with aggregated turnover below $50 million and no more than 80% of assessable income from passive sources.
30% for all other companies.

For franking, the company works out its rate by assuming its aggregated turnover, assessable income, and passive income will match the previous year.⁴

The maximum franking credit is calculated as:

Franking Credit = (Dividend Amount ÷ (1 − Corporate Tax Rate)) − Dividend Amount

A 30% company paying a $70 dividend can attach up to ($70 ÷ 0.70) − $70 = $30 in credits. A base rate entity paying the same $70 dividend can attach up to ($70 ÷ 0.75) − $70 = $23.33. Base rate entities therefore generate fewer credits per dollar of profit distributed.

The Benchmark Rule

All dividends paid within a single franking period must be franked at the same percentage. Whatever percentage the company picks for the first distribution in a period becomes the benchmark that every later distribution in that period has to match.⁵

A company can apply in writing to the Commissioner of Taxation to depart from the benchmark, but only in extraordinary circumstances that are unforeseeable and beyond the control of the entity, its members, and controllers. Approval must come before the franking account tax return is lodged, and in practice the exception is rarely granted.⁶

Penalty Taxes When the Ledger Goes Wrong

Franking Deficit Tax

If the account has a negative balance at the end of the income year (30 June for standard balancers), the company owes franking deficit tax equal to the deficit. A negative balance means the company handed out more credits than it had paid in tax, and FDT claws that overshoot back.⁷

Paying FDT is not purely punitive. The payment itself generates a franking credit that lifts the balance back to zero, and it also creates a tax offset the company can use against income tax in the same or a later year, with any excess carried forward.⁸

Over-Franking Tax

Over-franking tax applies when a distribution is franked at a higher percentage than the benchmark for the period. The tax equals the excess above the benchmark, worked out using a formula based on the distribution amount, the percentage differential, and the company’s gross-up rate. Unlike FDT, paying it does not generate a credit in the franking account.⁹

What the Credits Do in the Shareholder’s Hands

Australian Resident Individuals

A franking credit reduces the Australian resident shareholder’s personal tax bill dollar for dollar, and if the credit is larger than the tax owed, the excess is refunded in cash. That refundability is a defining feature of the Australian system.¹⁰

To claim, the shareholder must meet the ATO’s integrity rules, including the holding period rule and the related payments rule. Individuals whose total franking credit entitlements for the year are under $5,000 only need to satisfy the related payments rule.¹⁰

Non-Resident Shareholders

Non-residents are treated differently. The franked portion of a dividend paid to a non-resident is exempt from Australian withholding tax, but non-residents cannot claim a franking tax offset and cannot receive a refund of franking credits. The unfranked portion is subject to withholding tax, generally at 30%, or a lower rate (often 15%) where a tax treaty applies.¹¹

Tax-Exempt Organisations

Certain not-for-profits, including registered charities endorsed by the ATO as income tax exempt and endorsed deductible gift recipients, can also claim refunds of franking credits. They must have a physical presence in Australia and incur their expenditure principally in Australia.¹²

The 45-Day Holding Rule

To stop investors from buying shares just to grab the credits and selling straight away, shareholders must hold their shares “at risk” for a continuous period of at least 45 days (90 for preference shares) inside the qualification period. The qualification period runs from the day after acquisition to 45 days after the ex-dividend date, and neither the purchase day nor the sale day counts.¹³

Holding “at risk” means keeping real economic exposure. Options, futures, or similar arrangements that reduce risk of loss or opportunity for gain by 70% or more disqualify those days from counting. Individuals under the $5,000 credit threshold are exempt from the holding period rule but still need to satisfy the related payments rule.¹³

Distribution Statements to Shareholders

Every dividend must be accompanied by a distribution statement to each shareholder, because shareholders need it for their own returns. The statement must show:

The names of the paying entity and the shareholder.
The date and amount of the distribution.
The franking credit amount, rounded to the nearest cent.
The franking percentage to two decimal places, rounded up if the third decimal is five or more.
The franked and unfranked portions shown separately where the dividend is partly franked.
Any withholding tax deducted.
Any conduit foreign income declared in the unfranked portion.

Listed investment companies must add further detail about the attributable part of the dividend and which members may claim a deduction for it.¹⁴

When a Franking Account Tax Return Is Required

A franking account tax return is only required when the company has an FDT liability, an over-franking tax liability, a significant variation in benchmark franking percentages to disclose, or has received written notice from the Commissioner of Taxation requiring lodgment.⁷

For the 2025–26 income year, when tax is payable (FDT or over-franking tax), the return and payment are both due by the last day of the month after the income year ends, so 31 July for a company with a 30 June year-end. A disclosure-only lodgment with no amount payable, for a 30 June balancer, is due by 31 October. Companies using a substituted accounting period apply the last day of the month following their own year-end.¹⁵

Records supporting the franking account entries, including signed declarations authorising agents to lodge, must be kept for at least five years.¹⁶

Penalties for Late Lodgment

Missing the deadline triggers a failure-to-lodge penalty of one penalty unit for each 28-day period (or part) the return is overdue, capped at five penalty units. The base penalty is scaled by entity size:

Medium withholders: base penalty multiplied by 2.
Large withholders: base penalty multiplied by 5.
Significant global entities: base penalty multiplied by 500.

As of November 2024, one Commonwealth penalty unit is $330.¹⁷ At that rate, the maximum base penalty for a small entity is $1,650, while a significant global entity can face up to $825,000. Interest on any unpaid FDT or over-franking tax accrues on top.¹⁸

1
Australian Taxation Office. Franking Account
2
Australian Taxation Office. Franking Account Tax Return and Instructions 2023
3
The Treasury. Treasury Laws Amendment (Off-Market Share Buy-Backs) Bill 2022 Explanatory Memorandum
4
Australian Taxation Office. Changes to Company Tax Rates
5
Australian Taxation Office. Benchmark Rule
6
Australian Taxation Office. Instructions to Complete the Franking Account Tax Return – Section C Significant Variation in Benchmark Franking Percentage
7
Australian Taxation Office. Franking Account Tax Return
8
Australian Taxation Office. Franking Deficit Tax Offset Calculations, Reduction Rule and Exclusions
9
Australian Taxation Office. How to Calculate Over-Franking Tax and Under-Franking Debit
10
Australian Taxation Office. Refund of Franking Credits for Individuals
11
Australian Taxation Office. Dividends Paid or Credited to Non-Resident Shareholders
12
Australian Taxation Office. Eligibility for a Refund of Franking Credits
13
Australian Taxation Office. Franking Credit Trading
14
Australian Taxation Office. Issuing Distribution Statements
15
Australian Taxation Office. Franking Account Return
16
Australian Taxation Office. Franking Account Tax Return and Instructions 2024
17
Australian Financial Security Authority. Penalty Units
18
Australian Taxation Office. Failure to Lodge on Time Penalty