Franking credits are one of the quiet engines of returns for many self-managed super funds that invest in Australian shares. For a retirement-phase SMSF paying no tax on its earnings, they can do something unusual in the tax system: turn a Credit for tax already paid into an actual cash refund deposited into the fund. This feature of Australia’s Dividend Imputation system has been a fixture of SMSF investing for decades and remains fully in force in 2026. This article explains how franking credits work, why complying super funds can use them to offset tax, how excess credits become refundable, and — with a clearly labelled hypothetical example — why a fund taxed at 0% can receive the full credit back in cash.

 

What dividend imputation and franking credits are

Australia uses a system called dividend imputation to avoid taxing company profits twice. When an Australian company earns a profit, it pays company tax on it. When it then pays part of that after-tax profit to shareholders as a dividend, it can attach a franking credit representing the tax the company has already paid. The credit “imputes” that company-level tax to the shareholder.

A dividend can be fully franked, partly franked, or unfranked, depending on how much tax the company has paid on the underlying profit. A fully franked dividend carries the maximum franking credit. The Shareholder — including an SMSF — declares both the Cash Dividend and the franking credit as income, and then receives the franking credit as an offset against their own tax on that income.

 

How complying super funds use franking credits to offset tax

A complying super fund is a taxpayer. In accumulation phase, its Earnings are taxed at 15%. When such a fund receives a franked dividend, the attached franking credit reduces the tax the fund owes.

Because the company tax rate is higher than the 15% super rate, franking credits on fully franked dividends often more than cover the fund’s tax on that dividend income. The surplus does not simply vanish. This is where Australia’s approach differs from many other countries: excess franking credits are refundable. If a fund’s total franking credits exceed its total tax Liability for the year, the difference is paid back to the fund as a cash refund after it lodges its annual return.

 

Why a 0%-taxed retirement-phase fund can get a full cash refund

The effect becomes most pronounced in retirement phase. Earnings on Assets supporting a retirement-phase income stream are Exempt Current Pension Income and taxed at 0%. A fund entirely in retirement phase therefore has little or no tax liability against which to apply its franking credits.

With no tax to offset, the franking credits attached to the fund’s franked dividends become excess in their entirety — and, because they are refundable, the fund can receive the full amount back as cash. In other words, the credit for company tax already paid flows through to a 0%-taxed fund as a direct cash payment. This is a legitimate and long-standing feature of the imputation system, not a loophole.

 

A hypothetical worked example

The following is a hypothetical illustration only and does not reflect any particular fund.

Suppose the Harborview SMSF is fully in retirement phase and holds shares in an Australian company. During 2026–27 it receives a fully franked cash dividend of $7,000. At the company tax rate of 30%, the franking credit attached is calculated by grossing up: the credit equals the cash dividend multiplied by 30/70, which is $3,000.

The fund declares assessable income of $10,000 (the $7,000 cash plus the $3,000 franking credit). Because the fund is in retirement phase, its tax rate on that income is 0%, so the tax payable is nil. The full $3,000 franking credit has nothing to offset and becomes refundable. After lodging its annual return, the fund receives $3,000 in cash from the ATO, on top of the $7,000 dividend it already banked — a total benefit of $10,000 from that shareholding for the year.

This example is a simplified illustration to show the mechanics; actual outcomes depend on a fund’s full circumstances, franking percentages and the rules in force.

 

What SMSF trustees need to know

Franking credits are not guaranteed. They depend on the fund holding shares that pay franked dividends, and franking levels vary between companies and over time. An unfranked dividend carries no credit at all. Anti-avoidance rules, including the 45-day holding rule, require shares to be genuinely held at risk for a set period around the dividend for the credit to be claimed, subject to a small-holder exception. And the value of franking credits to a specific fund depends on its mix of retirement-phase and accumulation-phase assets, since only the tax position of the fund determines how much is offset and how much is refunded.

For SMSF trustees, franking credits are one input into an overall Investment and tax picture, not a strategy to be pursued in isolation. Their treatment is set by law and administered through the fund’s annual return, where the credits are reported and any refund is assessed. In a fund with both retirement-phase and accumulation-phase accounts, the split matters: credits attributable to accumulation assets first offset the 15% tax on those assets, while credits attributable to the 0%-taxed retirement-phase assets are the ones most likely to be refunded in full. Australian shares remain a significant part of many SMSF portfolios, and franked dividends are a large reason why. Because franking outcomes flow through the annual return rather than being received during the year, the cash refund typically arrives after lodgement, which is one reason many trustees Factor the timing into the fund’s cash-flow planning rather than assuming the credit is available immediately.

 

Key Takeaway

Under Australia’s dividend imputation system, fully franked dividends carry franking credits for company tax already paid. Complying super funds use these credits to offset their own tax, and excess credits are refundable. Because a retirement-phase SMSF pays 0% on its earnings, its franking credits generally have no tax to offset and can be refunded in full as cash. Franking outcomes depend on the shares held, franking levels and holding-period rules, and form one part of a fund’s broader position.