Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 1

To be perfectly franked, and pay no tax

Kerry Francis Bullmore Packer would have loved superannuation and franking credits. In 1991, he was subpoenaed to appear before a Parliamentary Committee enquiring into the print media, and it was wonderful theatre. He bellowed out his responses and left most of the Committee members cowering. But his most memorable response came when asked about his company’s tax minimisation schemes:

"Of course I am minimising my tax. And if anybody in this country doesn't minimise their tax, they want their heads read, because as a government, I can tell you, you're not spending it that well that we should be donating extra!"

You may not feel quite as critical as Mr Packer, since our taxes pay for health, schools and pensions, but the superannuation system has been designed to encourage people to finance their own retirement, so it makes sense to use it. Income in superannuation is taxed at 15% in the accumulation phase, and personal marginal tax rates rise from 15% to 19% when earnings exceed $18,200, so income in superannuation is tax effective for anyone earning above this amount.

But that’s only half the story. Let’s put franking credits into the mix by understanding how dividend imputation works. Companies pay tax on their profits at a rate of 30% before dividends are paid to shareholders. In the hands of an investor receiving the dividend, the tax paid is called a franking credit or an imputation credit. For tax purposes, the shareholder receives both a cash dividend plus the imputation credit, and is treated as if they paid tax equal to the imputation credit.

The system operates like this to avoid double taxation of income. In effect, the shareholder receives back the tax that has already been paid by the company and instead pays tax at the investor’s own tax rate. If the owner of the shares is on a tax rate less than the 30% company tax rate, such as superannuation funds, they are entitled to a rebate of the overpaid amount.

Let’s consider a simple example. A company earns a profit of $10,000, and pays tax of $3,000, leaving $7,000. It pays this amount as a franked dividend to its only shareholder, which is a super fund. In its tax return, the super fund adds the tax already paid by the company to the cash dividend received. The 'grossed up dividend' is $10,000, and the super fund pays tax on this at 15%, or $1,500. However, it receives a credit worth $3,000 for the amount of tax already paid by the company, leaving a tax refund of $1,500. Neat!

So it’s a matter of relatively simple maths to calculate how much fully franked dividends is needed to offset the income tax due on the rest of a super fund’s portfolio, and therefore pay no tax, meaning that no investments need to be sold to fund the tax bill.

Skip the following box if you don’t have a mind for numbers.

So with some current day numbers, this formula can be used with actual values for D (the dividend yield on the shares) and Y (the yield on the rest of the portfolio) to determine how much of a portfolio needs to be invested in fully franked shares to have a zero tax rate on the entire portfolio.

  • a franked dividend yield on the Australian shares portfolio of 6%
  • an unfranked yield on the remaining portfolio of 4% (eg term deposits).

The portfolio would only need to contain 32% of Australian shares paying fully franked dividends to have a zero tax rate. And without getting into a discussion on portfolio construction, most Australian super funds can justify an allocation to Australian shares of at least one-third.

The calculation ignores the impact of any realised capital gains and expenses from running the portfolio.

The combination of favourable tax rates and dividend imputation shows the power of saving in a superannuation vehicle. Once a fund converts to paying a pension, there is no tax payable by the fund on earnings. In this case, imputation credits are refunded in cash. Furthermore, if the pension recipient is aged over 60, then pension drawdowns are also tax free.

Kerry Packer would have loved it. All that income and no tax. And later, a refund from the government.  Kerry probably learned a lot from his father, and maybe it's no coincidence that this powerful process carries the same name as that equally powerful man. Sir Frank.

 

RELATED ARTICLES

The when and why of four million Australian retirees

Who needs the Caymans? 10 ways to avoid paying tax

Are franking credits back in Labor's sights?

banner

Most viewed in recent weeks

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Are franking credits hurting Australia’s economy?

Business investment and per capita GDP have languished over the past decade and the Labor Government is conducting inquiries to find out why. Franking credits should be part of the debate about our stalling economy.

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

The rubbery numbers behind super tax concessions

In selling the super tax, Labor has repeated Treasury claims of there being $50 billion in super tax concessions annually, mostly flowing to high-income earners. This figure is vastly overstated.

Latest Updates

Investment strategies

Trump's US dollar assault is fuelling CBA's rise

Australian-based investors have been perplexed by the steep rise in CBA's share price But it's becoming clear that US funds are buying into our largest bank as a hedge against potential QE and further falls in the US dollar.

Investment strategies

With markets near record highs, here's what you should do with your portfolio

Markets have weathered geopolitical turmoil, hitting near record highs. Investors face tough decisions on valuations, asset concentration, and strategic portfolio rebalancing for risk control and future returns.

Property

Soaring house prices may be locking people into marriages

Soaring house prices are deepening Australia's cost of living crisis - and possibly distorting marriage decisions. New research links unexpected price changes to whether couples separate or silently struggle together.

Investment strategies

Google is facing 'the innovator's dilemma'

Artificial intelligence is forcing Google to rethink search - and its future. As usage shifts and rivals close in, will it adapt in time, or become a cautionary tale of disrupted disruptors?

Investment strategies

Study supports what many suspected about passive investing

The surge in passive investing doesn’t just mirror the market—it shapes it, often amplifying the rise of the largest firms and creating new risks and opportunities. For investors, understanding these effects is essential.

Property

Should we dump stamp duties for land taxes?

Economists have long flagged the idea of swapping property taxes for land taxes for fairness and equity reasons. This looks at why what seems fairer may not deliver the outcomes that we expect.

Investing

Being human means being a bad investor

Many of the behaviours that have made humans such a successful species also make it difficult for us to be good, long-term investors. The key to better decision making is to understand what makes us human and adapt.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.