Dividend and Franking Credits Explained Simply: Complete Guide for Australian Beginners
Every February and August you hear "CBA dividend $2.20, NAB dividend $0.84, franking credits". What is dividend? What is franking credit? Why Australia unique? How does it reduce your tax? How to calculate yield? This deep guide for Falkon Analytics explains with CBA examples and tables - education only.
Part 1: What is Dividend? Profit Sharing
When company makes profit after tax, board has two choices: Keep profit to grow business (reinvest), or share profit with shareholders as dividend. Dividend is your share of company profit.
Example: Koala Coffee Pty Ltd makes $100k profit after tax, has 100 shares. Board decides to pay $50k as dividend, keep $50k to open new store. You own 10 shares (10%), you get $5,000 dividend (10% of $50k).
On ASX, big companies like CBA, NAB, WBC, BHP, Wesfarmers pay dividends twice a year: Interim (half-year, Feb) and Final (full-year, Aug). Some pay quarterly (e.g., some REITs).
Part 2: Franking Credits - Why Australia Unique
Franking credit is tax credit from company tax already paid, unique to Australia (and NZ). Introduced 1987 by Hawke/Keating government to avoid double taxation.
How it works: Company makes $100 profit before tax, pays 30% company tax = $30 tax, left $70 profit. Company pays $70 dividend to you. But company already paid $30 tax on that profit. So government gives you $30 franking credit (tax credit) to avoid taxing same profit twice.
Example: CBA makes profit, pays 30% tax, pays you $4.55 dividend fully franked. Franking credit = $4.55 x (30/70) = $1.95. Why 30/70? Because $70 dividend came from $100 profit before tax ($100 profit - $30 tax = $70 dividend). Franking credit = $30 tax paid = $70 dividend * 30/70 = $1.95.
Part 3: Key Dividend Terms Explained with CBA Example
| Term | What It Means | Example (CBA) |
|---|---|---|
| Dividend | Company shares profit with shareholders, paid from after-tax profit | CBA pays $2.20 interim + $2.35 final = $4.55 per year per share |
| Franking Credit | Tax credit from company tax already paid (30% in Australia), unique to Australia | CBA dividend $4.55 franked 100% at 30% = franking credit $1.95 per share |
| Grossed-Up Dividend | Dividend + Franking Credit = total taxable income | $4.55 + $1.95 = $6.50 grossed-up |
| Ex-Dividend Date | Date you must own shares to get dividend, usually 1 day before record date | CBA ex-div 14 Feb, if you buy on 15 Feb you don't get dividend |
| Record Date | Date company checks who owns shares to pay dividend | CBA record date 15 Feb |
| Payment Date | Date dividend paid to bank account | CBA payment date 28 Feb |
| Dividend Yield | Dividend / Share Price x 100 | CBA $4.55 / $120 = 3.79% yield, + franking = 5.4% grossed-up yield |
Part 4: How Franking Credits Reduce Your Tax - Calculation Table
This is magic of franking credits. You declare grossed-up dividend ($6.50) as income, calculate tax, then subtract franking credit ($1.95). If your tax rate less than 30%, you get refund! If more than 30%, you pay extra.
| Tax Bracket | Tax on $6.50 Grossed-Up Dividend | Minus Franking Credit $1.95 | Net Tax You Pay | After-Tax Cash |
|---|---|---|---|---|
| 0% (Low income < $18,200) | $0 | -$1.95 | Refund $1.95 | $4.55 + $1.95 refund = $6.50 |
| 19% ($18,201-$45k) | $1.235 (19% of $6.50) | -$1.95 | Refund $0.715 | $4.55 + $0.715 = $5.265 |
| 32.5% ($45k-$120k) | $2.112 | -$1.95 | Pay $0.162 | $4.55 - $0.162 = $4.388 |
| 37% ($120k-$180k) | $2.405 | -$1.95 | Pay $0.455 | $4.55 - $0.455 = $4.095 |
| 45% ($180k+) | $2.925 | -$1.95 | Pay $0.975 | $4.55 - $0.975 = $3.575 |
Example: Low income earner $0 tax bracket, gets $4.55 dividend + $1.95 refund = $6.50 total cash, same as company profit before tax. No double tax. High income earner 45% bracket, pays extra $0.975 tax, net $3.575, but still better than no franking (would pay 45% on $4.55 = $2.047 tax, net $2.50).
Important: To get franking credits, you must hold shares for 45 days (45-day holding rule) around ex-dividend date, and TFN must be provided, and you must be Australian tax resident. For super funds, franking credits even more valuable because super tax 15% < 30%, so super funds get refund.
Part 5: Dividend Yield - How to Calculate
Dividend Yield = Annual Dividend / Share Price x 100. Shows return from dividends alone, excluding capital gains.
Example: CBA share price $120, annual dividend $4.55, yield = $4.55 / $120 = 3.79%. Grossed-up yield with franking = $6.50 / $120 = 5.42%. This is why many retirees love CBA, NAB, Telstra for dividends.
High yield can be trap: If company pays 10% yield but share price falling 20% per year, total return negative. Example: Telstra yield 8% in 2017 but share price fell from $6 to $2.80 (-53%), total return negative. Always check if dividend sustainable (company making profit, not borrowing to pay dividend).
Part 6: Why Companies Pay Dividends? 4 Reasons
- Signal Profitability: Paying dividend signals company confident about future profits.
- Attract Income Investors: Retirees, super funds need income, prefer dividend paying companies.
- Discipline: Paying dividend forces company to be disciplined, not waste cash on bad acquisitions.
- Franking Credits Value: In Australia, dividends with franking credits more valuable than overseas, so companies pay dividends to pass franking credits to shareholders.
Why some companies don't pay dividends? Growth companies like Afterpay (now Block), Xero, Altium reinvest profit to grow faster, not pay dividend. They say: If we can grow profit 20% per year by reinvesting, better than paying dividend and you getting 4% yield.
Part 7: Real Case Study - CBA Dividend History
- 2020: CBA paid $2.98 dividend (cut due to COVID, APRA asked banks to cut dividends to preserve capital), share price $60 low, yield 4.9%.
- 2021: CBA paid $3.50 dividend, share price $100, yield 3.5%.
- 2022: CBA paid $3.85, share $100, yield 3.85%.
- 2023: CBA paid $4.50, share $105, yield 4.28% + franking 1.84% = 6.12% grossed-up.
CBA has paid dividend every year since 1991 listing, never missed, even GFC 2008 and COVID 2020 (cut but not zero). This is why considered blue chip.
Key Takeaways
- Dividend = your share of company profit after tax, paid from profit, usually twice a year (interim Feb, final Aug).
- Franking Credit = tax credit from company tax already paid (30%), unique to Australia, avoids double taxation. Dividend $70 fully franked = franking credit $30.
- Grossed-up dividend = dividend + franking credit = taxable income. Franking credit reduces your tax, can get refund if your tax rate <30%.
- Ex-dividend date = must own shares before this date to get dividend. Record date = company checks ownership. Payment date = cash paid.
- Dividend Yield = Dividend / Price x 100. High yield can be trap if share price falling or dividend not sustainable.
- To get franking credits: Hold 45 days, provide TFN, Australian tax resident.
Glossary
Dividend: Share of company profit paid to shareholders.
Franking Credit: Tax credit from company tax paid, 30% in Australia, unique.
Grossed-Up Dividend: Dividend + Franking Credit, taxable income.
Ex-Dividend Date: Must own shares before this date to get dividend.
Record Date: Date company checks who owns shares to pay dividend.
Payment Date: Date dividend paid to bank account.
Dividend Yield: Dividend / Share Price x 100, return from dividends.
45-Day Holding Rule: Must hold shares 45 days around ex-div to get franking credits.
TFN: Tax File Number, needed for franking credits and to avoid withholding tax.
FAQs
Do I pay tax on dividends?
Yes, dividends and franking credits declared in tax return (myTax). Grossed-up dividend is taxable income, franking credit reduces tax. You may get refund if tax rate <30%. Keep dividend statements from Computershare/Link. Seek accountant.
What is franking credit refund?
If your tax rate less than 30% (e.g., low income 0% or super fund 15%), franking credit $1.95 exceeds tax payable, you get refund from ATO. Example: Low income 0% gets $1.95 refund on $4.55 dividend. Super fund 15% gets $0.975 refund.
When do I get dividend?
Check ex-dividend date, record date, payment date on asx.com.au or company website. Must own before ex-div date. Payment usually 2 weeks after record date.
Why some companies don't pay dividend?
Growth companies reinvest profit to grow faster (e.g., Afterpay, Xero). They believe growing profit 20% better than paying 4% dividend. Income investors prefer dividend companies like CBA, Telstra.
Disclaimer: Education only. Not financial advice, not tax advice. Explains dividends and franking based on ATO and ASX public info. Tax rules change, 45-day rule, TFN, residency rules complex. Franking credit examples illustrative, actual tax depends on your situation. Seek licensed AFSL advice and accountant for tax. Past dividends not indicative of future. Company can cut dividend. Falkon Analytics independent research.