Key findings
- Franking credits are a tax mechanism that prevents the same company profit from being taxed twice — once at the company and again at the shareholder level.
- Australian shares ETFs (such as VAS, A200, STW and IOZ) typically pass through franking credits to unit-holders. International shares ETFs do not.
- A fully-franked 4% cash dividend grosses up to a pre-tax yield of approximately 5.71%, because the franking credit equals 30/70 of the cash dividend.
- Tax treatment depends on your individual circumstances. Speak with a registered tax adviser before making investment decisions based on tax considerations.
Franking credits are one of the more confusing features of the Australian tax system, and they get more confusing when ETFs enter the picture. This plain-English guide explains what franking credits actually are, how they work when an ETF holds Australian companies, which ASX ETFs typically pay franked distributions, and how to estimate the impact.
Tax content requires extra care. Tax treatment depends on your individual circumstances. Speak with a registered tax adviser before making investment decisions based on tax considerations. The mathematical examples in this guide are hypothetical — actual tax outcomes depend on your individual circumstances.
What are franking credits?
Franking credits exist because Australia operates a dividend imputation tax system. Without imputation, company profits would be taxed twice: once when the company earns them (30% company tax), and again when the shareholder receives them as a dividend (at the shareholder's marginal tax rate). That would mean a company profit could effectively be taxed at over 50% before the shareholder sees anything.
Imputation fixes that by attaching a franking credit to each dividend the company pays. The franking credit represents the company tax already paid on the underlying profit. On the shareholder's tax return, the dividend is "grossed up" — the franking credit is added back to the cash dividend to reflect the pre-tax company profit. The shareholder pays tax on the grossed-up amount at their marginal rate, then claims the franking credit as a tax offset against that liability.
The net result is that the shareholder ends up paying the difference between their marginal rate and 30%. If their marginal rate is below 30%, the difference is a refund. If their marginal rate is above 30%, additional tax is owed. The 30% company tax is not lost — it flows through to the shareholder as a credit.
This is general information only. Tax treatment depends on your individual circumstances. Speak with a registered tax adviser.
How franking credits work with ETFs
ETFs are transparent for tax purposes — they don't pay tax themselves on dividend income that is distributed to unit-holders. Instead, they pass through every component of the underlying distributions (cash dividend, franking credit, foreign income, capital gains and other items) to unit-holders in proportion to their holding.
When an Australian shares ETF (such as VAS, A200, STW or IOZ) holds Commonwealth Bank, BHP, Telstra and other ASX-listed companies, those companies pay franked dividends to the ETF. The ETF collects the dividends and the franking credits, then distributes them — usually quarterly — to ETF unit-holders.
Each quarter, ETF investors receive a cash distribution into their bank account, plus a record of the attached franking credits. At the end of the financial year, the fund manager issues an Annual Tax Statement (ATS) summarising all components for the year. The franking credit total appears as a tax offset on the investor's tax return.
The mechanics are straightforward in principle. The exact numbers depend on which companies the ETF held during the year, what franking percentage those companies attached to their dividends, and the investor's individual tax position. General information only.
Which Australian ETFs pay franked distributions
Most broad Australian shares ETFs distribute with high franking attachment because the large companies in the ASX 200 and ASX 300 (banks, miners, supermarkets, telcos) historically pay franked dividends. Dividend-focused ETFs specifically screen for franked-dividend payers and tend to have the highest franking attachment.
| ETF | Trailing yield | MER | Distribution frequency | Franking |
|---|---|---|---|---|
| VAS | 3.3% | 0.07% p.a. | Quarterly | High (typically 70–90%) |
| A200 | 3.3% | 0.04% p.a. | Quarterly | High (typically 70–90%) |
| STW | 3.4% | 0.05% p.a. | Quarterly | High (typically 70–90%) |
| VHY | 4.1% | 0.25% p.a. | Quarterly | Very high (typically 85–100%) |
| IHD | 5.1% | 0.3% p.a. | Semi-annually | Very high (typically 85–100%) |
| SYI | 4.8% | 0.2% p.a. | Quarterly | Very high (typically 85–100%) |
The franking percentages shown are typical ranges. The actual franking attached to each distribution is disclosed in the Annual Tax Statement issued by the fund manager. Yields shown are trailing distribution yields and can change. Past performance is not a reliable indicator of future performance.
Broad market vs dividend-focused. VAS, A200, STW and IOZ are broad-market Australian shares ETFs that hold the ASX 200 or ASX 300 by market capitalisation. They distribute whatever dividends those companies pay, with whatever franking the companies attach. VHY, IHD and SYI are dividend-focused — their indices screen for high dividend yields and franking attachment, so the resulting franking percentage is typically higher.
General information only. Consider speaking with a licensed financial adviser.
How to calculate the value of franking credits
The arithmetic is straightforward. For a fully-franked dividend (100% franking), the franking credit equals 30/70 of the cash dividend. Combined, the cash dividend and the franking credit represent the company's pre-tax profit.
The formula is:
Franking credit = Cash dividend × (0.30 / 0.70) × (franking percentage / 100)
Hypothetical example 1 — fully-franked dividend. Say you receive $1,000 in cash dividends from VAS in a year, fully franked. The franking credit is $1,000 × (0.30 / 0.70) × 1.00 = $428.57. The grossed-up dividend is $1,000 + $428.57 = $1,428.57. If your marginal tax rate is 32.5%, your tax on the grossed-up dividend is $1,428.57 × 0.325 = $464.29. Subtracting the franking credit offset of $428.57, you owe net tax of $35.72. So $1,000 of fully-franked dividends costs $35.72 in net tax at a 32.5% marginal rate — leaving $964.28 after tax. This is a hypothetical example only. Actual tax outcomes depend on your individual circumstances.
Hypothetical example 2 — partially-franked dividend. Say you receive $1,000 in cash dividends from a partially-franked ETF (60% franking). The franking credit is $1,000 × (0.30 / 0.70) × 0.60 = $257.14. The grossed-up dividend is $1,000 + $257.14 = $1,257.14. At a 32.5% marginal rate, tax is $1,257.14 × 0.325 = $408.57. Subtracting the franking credit, you owe $151.43 in net tax. After-tax value: $848.57. This is a hypothetical example only.
Hypothetical example 3 — low marginal rate. Same fully-franked $1,000 dividend, but the investor's marginal tax rate is 19%. Tax on the grossed-up amount is $1,428.57 × 0.19 = $271.43. The franking credit offset of $428.57 exceeds the tax liability, generating a tax refund of $157.14. So $1,000 of fully-franked dividends produces a $157.14 refund at a 19% marginal rate — and the investor's effective after-tax dividend is $1,157.14. This is a hypothetical example only. Actual tax outcomes depend on your individual circumstances.
You can estimate the impact for specific scenarios using the ETFLens franking calculator — general information only.
Estimate your franking credit impact
Plug your cash dividend, franking percentage and marginal rate into the calculator.
Open Franking Calculator →Franking credits and different investor types
Franking credits interact differently with different tax positions. The mechanics are the same; the after-tax outcome depends on the marginal rate.
This section describes how the system applies to different rate brackets — it does not recommend any particular investor type hold any particular ETF. Tax treatment depends on individual circumstances; consider speaking with a registered tax adviser.
- 0% marginal rate (income below the tax-free threshold) — the entire franking credit becomes a refund. A fully-franked $1,000 dividend produces a $428.57 refund.
- 19% marginal rate — tax on the grossed-up dividend is less than the franking credit, so the difference is refunded.
- 30% marginal rate — the franking credit exactly offsets the tax liability. No additional tax and no refund.
- 32.5% marginal rate — small additional tax owed (the 2.5% gap to the 30% company tax rate).
- 37% marginal rate — 7% additional tax owed on the grossed-up amount.
- 45% marginal rate — 15% additional tax owed on the grossed-up amount.
- SMSF in accumulation (15% rate) — franking credit exceeds the tax liability, generating a refund. This is why some SMSF investors prefer Australian-domiciled ETFs with high franking.
- SMSF in pension phase (0% rate) — the entire franking credit is refundable.
These outcomes describe how the dividend imputation system applies at different rates. They are not investment advice. Whether any ETF is appropriate for any particular investor depends on a broader set of factors including investment objectives, risk tolerance, investment horizon and other holdings. Consider speaking with a licensed financial adviser.
International ETFs and franking
International shares ETFs — such as VGS, NDQ, IVV and BGBL — typically do not carry franking credits.
The reason is simple: the underlying companies are not Australian. Microsoft, Apple, Nvidia, Toyota, Nestlé and the other companies these ETFs hold pay their corporate tax to the IRS, the Japanese Tax Agency, the German tax authority or wherever they are domiciled — not to the Australian Taxation Office. The Australian franking regime applies only to dividends paid by Australian-resident companies that have paid Australian company tax. Foreign dividends do not have Australian franking credits attached because no Australian company tax has been paid on the underlying profit.
International ETFs can, however, pass through Foreign Income Tax Offsets (FITOs) — a credit for foreign withholding tax paid on dividends. FITOs are not franking credits; they operate under different rules and limits. The FITO amount is disclosed in the Annual Tax Statement.
For an investor holding both Australian and international ETFs, the practical effect is that the Australian portion of the portfolio carries franking credits while the international portion does not. After-tax yield from the Australian portion may therefore differ from after-tax yield on the international portion, even before considering different underlying gross yields. The ETFLens Income Planner can model after-tax income from a hypothetical portfolio across marginal rates.
General information only. Tax treatment depends on your individual circumstances. Speak with a registered tax adviser before making investment decisions based on tax considerations.
Common questions about ETF franking credits
Do I need to fill in franking credits manually on my tax return? Usually not. Each year, fund managers report ETF distribution components to the ATO. By August–October following the financial year end, this data flows into the ATO's pre-fill service and most tax software (myTax, accountant tax software) pulls it in automatically. You should always check the pre-filled amounts against your Annual Tax Statement before lodging.
If an ETF says "fully franked", does that apply to every distribution? Not necessarily. ETFs hold many companies, each with its own franking percentage. The fund's overall franking percentage is the weighted average across underlying dividends in that period. A fund might be 100% franked one quarter and 75% franked the next. The Annual Tax Statement shows the actual figures.
Do franking credits count as part of the distribution yield? The trailing distribution yield published on ETF detail pages is usually the cash distribution divided by the unit price — it does not include the franking credit value. A "fully-franked 4% yield" represents a grossed-up pre-tax yield of approximately 5.71%. Whether you should think in cash-yield or grossed-up terms depends on your tax position.
Can I lose franking credits? The 45-day holding rule means you generally need to hold the ETF (and bear the economic risk of doing so) for at least 45 days around the ex-dividend date to claim the franking credit. Day-trading around ex-distribution dates can disqualify the credit. For long-term holders, the 45-day rule is not normally a concern. The $5,000 small shareholder exemption provides relief for total annual franking credits below $5,000. Tax treatment depends on your individual circumstances.
Are franking credits being abolished? Franking refunds for some investors have been politically debated in recent years but as at Q2 2026 the imputation system remains in place as described. Tax policy can change. This article reflects the law as at publication.
Model the after-tax impact of franking credits on a hypothetical ETF portfolio.
Open the Franking Calculator on ETFLens →General information only. Not financial advice. This article does not consider your personal financial situation, objectives or needs. Tax treatment depends on your individual circumstances and may change. Past performance is not a reliable indicator of future performance. Distribution yields, franking percentages and tax outcomes can change. ETFLens does not hold an Australian Financial Services Licence and does not provide tax or financial advice. Always read the relevant Product Disclosure Statement (PDS) before investing. Speak with a registered tax adviser before making investment decisions based on tax considerations, and a licensed financial adviser (AFS licence holder) before making any investment decision.