The Secret Tax Hack Every Aussie Should Know

Think you’re already getting the most out of your tax return? Think again...There’s a little-known strategy that savvy Australians are quietly using to legally reduce their tax bill and it’s hiding in plain sight. 

Whether you're an employee, business owner or professional,  this simple hack could put hundreds (even thousands) back in your pocket! This simple hack could put hundreds (even thousands) back in your pocket! Ready to stop overpaying the ATO?

Let’s break it down...

Ever wondered why your dividend statement has a weird little line that says “franking credits”? It’s one of those things that sounds boring — but it’s actually free money from the ATO (sort of). 

When a company makes a profit, it has to pay tax — usually 30%. Then, if it pays out some of those profits to shareholders (that’s you) as dividends, the government used to tax that money again when it landed in your pocket. Yep, double tax. Ouch.

So in 1987, the government decided that was a bit rough and brought in franking credits (also called imputation credits). These are basically a tax credit that says, “Hey, this company has already paid tax on your behalf, so you don’t have to pay it again.”

How It Works 

Say a company earns $1,000 in profit. It pays $300 in company tax and is left with $700. That $700 goes out to you as a dividend — but it comes with a little gift: a $300 franking credit.

On paper, you’ve earned $1,000 (the full amount before tax). The $700 hits your bank account, and the $300 credit goes to the ATO as proof that the tax has already been paid.

If you’re on a higher tax rate (say 37%), you owe $370 in tax. You use the $300 credit to reduce your bill — so you only pay $70 out of pocket. If you’re on a lower tax rate (say 16%), you’ve technically paid too much tax — so the ATO gives you back $140. Yep, a refund.

And the great news is that if you have Australian shares in your superfund you are also entitled to these refunds. This is advantageous for those on an accounts based pension because they can  get 100% of the imputation credits back as a refund! 

Why They’re Useful

Franking credits stop you from being taxed twice on the same money. They also make dividend-paying shares — especially Aussie ones — a lot more attractive. They can:

• Boost your effective return (because the franking credits are part of your income).
• Reduce your tax bill (sometimes to zero).
• Even give you a refund if your marginal tax rate is lower than the company tax rate.

The Backstory

Before franking credits came along, investors got slugged twice — once when the company paid tax, and again when they got their dividend. The 1987 reforms fixed that.

Then in 2000, the government made franking credits refundable — meaning if you don’t use them all, you actually get the leftovers back as a refund.

And when Labor tried to wind that back in 2019, the idea went down like a lead balloon. Voters hated it. Bill Shorten even admitted it “misread the mood.”

Not All Dividends Are Created Equal

Some Aussie companies pay fully franked dividends (like the big banks). Others pay partly franked or unfranked dividends (like CSL, which earns a lot of money overseas and pays tax outside Australia).

So, not every dividend comes with a full set of credits. It depends where the company earns its profits and pays its tax.

This can also lead to what’s called home bias — investors chasing Aussie companies for the franking benefits and ignoring international shares, which can sometimes perform better overall.

Why Australian Shares Are So Good

Franking credits are one of the reasons Aussie shares are such a gem for long-term investors. When you own shares in strong Australian companies — the banks, miners, telcos, and healthcare giants — you’re getting paid part of their profits after tax. And those franking credits make your returns go even further.

That’s also why many investors use index funds that track the ASX 200.They give you a simple, diversified slice of Australia’s biggest companies — many of which pay regular, fully franked dividends. It’s low cost, low effort, and (best of all) tax efficient.

The Bottom Line

Franking credits might sound like a dry accounting concept, but they’re one of the most powerful wealth-building tools available to everyday Australians.

They stop you from being taxed twice, can reduce your tax bill (or even get you a refund), and they boost your long-term returns — all while rewarding you for investing in strong, local companies.

Combine that with regular, automatic investing — even a modest $100 a month — and you’ve got one of the simplest, smartest ways to build financial freedom over time.

So don’t wait for “the perfect time” to start investing. Just start — small, consistent, and automatic. Because in a decade or two, you’ll look back and think: “Geez, I’m glad I started when I did.”

How You Can Take Advantage

Here’s what I’d suggest doing ...

1. Set up an automatic minimum  monthly investment.
   Choose a simple, broad Australian index fund (like one tracking the ASX 200). Don’t get caught up in the noise — keep it simple.
2. Reinvest your dividends.
   Switch on the “Dividend Reinvestment Plan” (DRP) so your dividends (and their franking credits) automatically buy you more shares.

Then leave it alone. Don’t panic when the market wobbles. Just keep investing and let time and compounding do the heavy lifting. Because wealth isn’t built by luck — it’s built by steady habits.