Australian companies pay 30% tax on profits (25% for smaller companies). When they pay a dividend from those taxed profits, it carries a franking credit for the tax paid, so the same profit is not taxed twice.
The investor includes the dividend plus the credit in taxable income, then subtracts the credit from the tax due. Investors on low tax rates, including many retirees and super funds in pension phase, can receive the excess as a refund.
Why it matters
Franking makes Australian dividends worth more to Australian residents than their cash value, which is one reason local investors favour high-yielding ASX shares. Overseas investors cannot use the credits.
General information, not advice.