If you invest in Aussie shares, you’ve probably come across franking credits. They’re a tax credit on dividends – and can be handy for investors. But most other countries don’t have them.

So why does Australia do things differently? It comes down to how countries tax company profits and dividends. Some tax them twice. Australia doesn’t.

In this article, we’ll explore why franking credits exist, why other countries take a different approach and whether any have a similar setup. You’ll see what makes Australia’s system stand out – and how it shapes the way Aussies invest.

What are franking credits?

A franking credit is a tax credit attached to dividends from Australian companies. They exist to stop company profits from being taxed twice.

Here’s how it works: companies pay tax on their profits before distributing dividends to shareholders. Instead of incurring tax for that company income again, investors receive a credit for the tax already paid. This means the investor’s final tax bill reflects what’s already been paid at the company level.

Franking credits can be used to offset tax on other income. For some investors, they may even lead to a refund at tax time.

For a deeper understanding, check out this article about franking credits and how they work.

Why does Australia have franking credits?

Franking credits weren’t always part of Australia’s tax system. Before 1987, investors got taxed twice on company profits – once when the company paid tax, then again when they received dividends. Not exactly fair, right?

To fix this, the Australian government introduced franking credits. Now, as we mentioned investors get a credit for the tax already paid at the company level. This means they only pay tax on what’s left over, not the full amount.

The idea was to make investing in Australian companies more appealing. If shareholders own the company, the Government reasoned, it makes sense for them to get a fairer tax deal.

Franking credits also influence how Australians invest. They’re a big deal for retirees, super funds, and anyone who relies on dividends for income. Instead of chasing growth stocks, many investors focus on companies with high, fully franked dividends .

Not all countries take this approach, though. As we’ll see next, most have stuck with taxing dividends separately.

Why don’t other countries have franking credits?

Most countries tax company profits and dividends separately. Companies pay tax on earnings, and investors pay tax again when receiving dividends. It’s a different approach, but it’s the norm globally.

Some governments prefer this system because it boosts tax revenue. Instead of giving investors credits, they collect taxes at both levels. In many cases, dividends are taxed at lower rates to soften the impact, but double taxation still exists.

Another reason is different priorities. Australia introduced franking credits to encourage investment and dividend-paying companies. Other countries focus on different tax policies, like capital gains incentives or deductions for business reinvestment.

Even countries that once had similar systems have moved away from them. The United Kingdom scrapped its dividend tax credit system in 1999. New Zealand still has imputation credits, but they aren’t refundable like Australia’s.

So while Australia’s system stands out, some countries do have partial solutions. Let’s look at the closest alternatives.

Do any other countries have a similar system?

While most countries tax dividends differently, a few have systems that share some similarities with Australia’s franking credits. Some offer partial tax relief, but none fully eliminate double taxation like Australia does.

• New Zealand , as we highlighted above, has imputation credits which work a lot like franking credits. Companies pay tax on profits, and shareholders receive credits for it. The key difference is the credits aren’t refundable. If the credit exceeds the tax an investor owes, they don’t get a refund – meaning low-income investors don’t benefit as much as in Australia.
• Canada has a dividend tax credit system to reduce double taxation. Canadian companies pay tax on profits, and shareholders receive a tax credit based on the type of dividend they receive. The system lowers the tax burden, but it’s not a full imputation system like Australia’s.
• The UK used to have a dividend tax credit system, until 1999. Now, investors receive a tax-free dividend allowance each year. Once they exceed that allowance, dividends are taxed at different rates depending on their income.
• The US takes a different approach. Instead of offering credits, it taxes qualified dividends at lower rates than ordinary income. While this reduces the impact of double taxation, it doesn’t directly link the tax investors pay to the tax already paid by companies.
• Other European countries generally tax dividends separately from company profits, often at reduced rates or with deductions to prevent extreme double taxation.

In short, although a few countries offer dividend tax breaks, none fully match Australia’s franking credit system. Now, let’s break down how franking credits are calculated.

How are franking credits calculated?

Franking credits are based on the tax a company has already paid on its profits. In Australia, companies pay a tax rate of up to 30%. If they distribute after-tax profits as dividends, they can attach franking credits equal to the tax already paid.

Here’s a simple example:

• A company earns $100 in profit and pays 30% tax ($30).
• It distributes the remaining $70 as a fully franked dividend.
• The investor receives $70 in cash plus a $30 franking credit.

For tax purposes, the investor includes the full $100 as income but gets a credit for the $30 already paid. If their tax rate is lower than 30%, they may receive a refund. If it’s higher, they pay the difference.

Not all dividends are fully franked. Some companies pay partially franked dividends, meaning they’ve paid less than 30% tax, so the attached credit is smaller. Unfranked dividends come without franking credits because the company hasn’t paid tax on that portion of profits.

If you want to calculate franking credits for your investments, check out Pearler's Franking Credits Calculator .

How franking credits influence investing behaviour

As we’ve said, franking credits don’t just reduce tax – they shape how Australians invest. Since they boost after-tax returns, plenty of investors chase fully franked dividends.

That’s had a big impact on the Australian Securities Exchange . Unlike markets dominated by tech giants and high-growth stocks, Australia’s market leans toward dividend-heavy companies. Think banks, miners, and industrial giants – many of which offer fully franked payouts.

Here’s how that plays out:

• Dividend investing gets a boost – Investors often prioritise income over capital growth, favouring established dividend payers over fast-growing companies.
• Aussie shares get more love – Since franking credits only apply to Australian companies, some investors stick to the local market rather than investing globally.
• Retirees and super funds benefit – Fully franked dividends can be a tax-effective income stream, especially for those on lower tax rates.

That said, franking credits aren’t the only factor to consider when investing. Growth stocks, often found in global markets, can offer strong long-term returns – e ven without franking benefits.

Everyone’s situation is different. If you're unsure how franking credits fit into your investment strategy, consider speaking with a financial adviser to get a better idea.

A unique system with big implications

Franking credits set Australia apart. They change how dividends are taxed, influence investment decisions, and shape the local share market. While most countries adopt a different approach, Australia’s system is designed to benefit investors – particularly those who rely on dividends for income.

But tax rules aren’t the only thing that matters when investing. Whether you focus on dividends, growth, or a mix of both depends on your goals, risk tolerance, and long-term strategy.

If you’re weighing up your options, it’s worth considering how franking credits fit into the bigger picture.