Franking credits, explained simply

When an Australian company pays tax on its profits and then pays you a dividend, it attaches a 'franking credit' representing the tax already paid. The credit prevents the same profit being taxed twice — once in the company's hands, once in yours.

At tax time you include both the cash dividend and the franking credit in your assessable income, then claim the franking credit as a tax offset. If your marginal rate is below the company rate, the excess credit may be refunded to you in cash. That refund is why franking is especially valuable for low-income earners and super funds in pension phase.

The practical effect: a fully franked dividend is worth more to you after tax than an unfranked dividend of the same cash amount. For someone on a low marginal rate, the cash refund can make the effective return on a franked dividend meaningfully higher.

But franking is a tax mechanic, not an investment thesis. A company that pays fully franked dividends but whose business is declining is still a bad investment. Franking improves the after-tax return of a good holding; it doesn't create one.

Index ETFs that hold Australian shares pass through franking credits, so you get the benefit even through a fund. The mix of franked (often Australian) and unfranked (often global) dividends is one reason a balanced portfolio holds both — they're taxed differently and serve different purposes.

If you hold Australian shares or an ASX index ETF, make sure your dividends and franking credits flow correctly into your tax return — most platforms supply a statement that pre-fills this. The credit is real money; don't leave it on the table.