Franking Credits and ETFs: Which Australian Funds Pay Them and How Much? (2026)

Franking credits are one of the most valuable tax features available to Australian investors — and one of the least understood. They are attached to dividends from Australian companies that have already paid 30% corporate tax, and they either reduce your tax bill or generate a cash refund from the ATO depending on your tax rate.

For ETF investors, the degree to which your ETF passes through franking credits depends entirely on what the ETF holds — Australian shares generate franking credits, international shares do not.

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What Are Franking Credits?

When an Australian company earns a profit and pays corporate tax at 30%, then distributes a dividend to shareholders, those shareholders receive both the cash dividend and an attached "franking credit" representing the corporate tax already paid.

The Australian tax system's dividend imputation system is designed to prevent double taxation. Instead of paying corporate tax (30%) and then income tax on the dividend, investors receive a credit for the corporate tax and pay only the difference between their marginal rate and 30%.

The formula:

• Cash dividend received: $700
• Franking credit: $700 × (30/70) = $300
• Grossed-up dividend (assessable income): $700 + $300 = $1,000
• Tax at marginal rate 39%: $1,000 × 39% = $390
• Less franking credit: $390 − $300 = $90 net tax
• Effective rate on the $700 cash: 12.9%

If your marginal rate is below 30%:

• Tax at 16%: $1,000 × 16% = $160
• Less franking credit: $160 − $300 = −$140 (ATO refund)

At low income levels, franking credits generate actual cash refunds from the ATO — you receive more money back at tax time than you paid in.

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Which ETFs Pay Franking Credits?

Only ETFs holding Australian shares generate franking credits. International shares ETFs generate no franking credits because overseas companies pay no Australian corporate tax.

High franking ETFs (70–80% franked):

ETF	Asset class	Approximate franking %
VAS	Australian shares (ASX 300)	~75%
A200	Australian shares (ASX 200)	~75%
IOZ	Australian shares (ASX 200)	~75%
STW	Australian shares (ASX 200)	~75%
MVB	Australian banks	~90%+

Australian banks (CBA, NAB, ANZ, WBC) and many large Australian industrials are fully or near-fully franked. Because banks represent ~30% of the ASX, Australian shares ETFs have high overall franking percentages.

Partial franking ETFs (15–30% franked):

ETF	Asset class	Approximate franking %
DHHF	Australian + global shares	~22%
VDHG	Australian + global shares + bonds	~18%
VDAL	Australian + global shares	~20%

The Australian shares component of these all-in-one ETFs generates franking credits. The international component does not. The blended franking percentage reflects the proportion of the portfolio in Australian shares (~35–40% for DHHF).

Zero franking ETFs:

ETF	Asset class	Franking %
VGS	Global developed markets	0%
BGBL	Global developed markets	0%
IVV	US S&P 500	0%
NDQ	NASDAQ 100	0%
VGE	Emerging markets	0%

All international-only ETFs generate zero franking credits. Distributions from these ETFs are fully taxable at your marginal rate with no offset.

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How Much Are Franking Credits Worth?

The dollar value of franking credits depends on your marginal rate, the ETF's franking percentage, and the distribution amount.

Example: $100,000 in VAS, 4.2% distribution yield, 75% franked

Annual distribution: $4,200 Franked component: $4,200 × 75% = $3,150 Unfranked component: $4,200 × 25% = $1,050

Franking credit on the franked component: $3,150 × (30/70) = $1,350 in franking credits

Tax calculation at different marginal rates:

Marginal rate (incl. Medicare)	Tax on grossed-up amount	Less franking credit	Net tax	Effective rate on cash
0% (tax-free threshold)	$0	−$1,350	−$1,350 (refund)	−32.1%
18% (16% + 2%)	$855	−$1,350	−$495 (refund)	−11.8%
32% (30% + 2%)	$1,440	−$1,350	$90	2.1%
39% (37% + 2%)	$1,755	−$1,350	$405	9.6%
47% (45% + 2%)	$2,115	−$1,350	$765	18.2%

Even at the highest marginal rate (47%), the effective tax rate on the VAS distribution is 18.2% — well below the 47% that would apply to fully unfranked income. This is the franking benefit.

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Franking Credits in Retirement and Low-Income Years

Franking credits are particularly valuable for:

Retirees with low taxable income: If you retire with $50,000/year in distributions from VAS and no other income, your marginal rate on most of that income is 0–16%. Franking credits would generate significant ATO refunds — additional cash back from the government each year.

Low-income investors: Students, part-time workers, and others below the tax-free threshold receive a full refund of all franking credits. A student holding $20,000 in VAS receiving $840 in distributions with $300 in franking credits would receive the $300 back from the ATO — an effective negative tax rate on the investment.

SMSFs in pension phase: Self-managed super funds in pension phase pay 0% tax on investment income. All franking credits in this phase are refunded — making Australian shares (and their high franking) extremely valuable for pension-phase SMSFs.

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Franking Credits and the Strategic Allocation Question

The value of franking credits should influence how you think about your Australian vs international shares allocation — particularly as your marginal rate changes over time.

When franking credits are most valuable: Low income years (early retirement, career break, study), pension phase in super, and for investors in the 16–30% marginal bracket.

When franking credits matter less: For investors in the 37–45% bracket, the tax saving from franking is real but the growth return from international shares (which have historically outperformed Australian shares over 10+ year periods) may outweigh the franking advantage.

A practical framework:

• In accumulation at high income (37%+ marginal rate): weight toward global growth (VGS/BGBL/IVV) where absolute returns are expected to be higher
• In drawdown at lower income (0–30% marginal rate): weight toward Australian shares (VAS/A200) where franking credits become more valuable

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Frequently Asked Questions

Do ETFs pay franking credits in Australia?

Only Australian shares ETFs pay franking credits. ETFs like VAS and A200 pass through approximately 70–80% franked distributions because they hold large Australian companies (particularly banks) that pay fully franked dividends. International ETFs (VGS, BGBL, IVV, NDQ) pay no franking credits because overseas companies pay no Australian corporate tax.

How much are franking credits worth on VAS?

On $100,000 in VAS at a 4.2% distribution yield (~75% franked), you receive approximately $1,350 in franking credits annually. At a 39% marginal rate, this reduces your net tax on the distribution from approximately $1,755 to $405 — saving $1,350. At 0% marginal rate (retired, low income), the full $1,350 is refunded by the ATO.

Can I receive a refund of ETF franking credits?

Yes — if your tax liability is less than your total franking credits in a year, the ATO refunds the difference as a cash payment. This is particularly valuable for retirees with low taxable income, students, and super funds in pension phase. There is no minimum income required to receive a franking credit refund.

Do DHHF and VDHG pay franking credits?

Yes, partially. DHHF and VDHG hold both Australian and international shares. The Australian shares component (~35–40% of the portfolio) generates franking credits; the international component does not. The blended franking percentage for both ETFs is approximately 18–22%. For investors specifically seeking maximum franking credits, dedicated Australian shares ETFs (VAS, A200) generate significantly more.

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General information only. Not financial advice.

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