Franking credits (also called imputation credits) are to prevent double taxation (once on company profits, then again on the capital gains when those profits are distributed to shareholders).
- You only get franking credits when investing in Australian companies.
For example, suppose Woolworths makes a profit 700 million is distributed to shareholders as dividends, who then would have to pay tax on the capital gains, hence double taxation. In this case, we say there is a $300 million franking credit, which can be claimed by shareholders, resulting in a tax refund (if their marginal tax rate is less than 30%) or paying differing tax rate (if the marginal tax rate exceeds 30%).
In Australia, franking credit is paid to investors in a 0% to 30% tax bracket. Franking credits are paid proportionally to the investor’s tax rate. An investor with a 0% tax rate will receive the full tax payment paid by the company to the Australian Taxation Office as a tax credit. Franking credit payouts decrease proportionally as an investor’s tax rate increases. Investors with a tax rate above 30% do not receive franking credits with dividends. (source)
Most countries require a holding period for receiving franking credits. In Australia, the holding period is 45 days. An investor must hold the stock for 45 days in addition to the purchase and sale date to qualify for a franking credit. (source)
When filing personal income taxes, an investor receiving a franking credit will typically record as income both the amount of the dividend and the amount of the franking credit. Grossed up dividend is a term used for the combined dividend and franking credit. (source)
From what I understand, franking credits only help investors in lower tax brackets.