You Hold ASX Shares From the US: Why Franking Credits Won’t Help You and What Actually Will

The dividend statement arrives in your inbox and you scroll to the familiar line items. Cash dividend: $1,400. Franking credit: $600. You remember exactly how this worked when you lived in Australia. You entered it on your tax return, the ATO treated the franking credit as a pre-payment on your behalf, and if the credit exceeded your marginal tax liability, the excess came back to you as a refund. Efficient, elegant, and now entirely irrelevant to your situation.

You are living in the United States. The rules did not follow you across the Pacific. Instead, you face a layered tax obligation that spans two revenue authorities, operates under a treaty most people have never read, and delivers completely different outcomes depending on whether your dividends are fully franked, partially franked, or unfranked. The figure sitting on your dividend statement under “franking credits” is not a receivable. Understanding what it actually is, and what the IRS will do with that same dividend, changes the picture substantially.

Franking credits and non-residents: what the law actually says

Under Australian domestic law, a non-resident shareholder cannot claim a refund of franking credits. Section 67-25(1DA) of the ITAA 1997 specifically excludes non-residents from the refundable tax offset provisions. You are not assessable on the franking credit as income, and you cannot include it on an Australian tax return as a credit against Australian tax.

This catches almost everyone who moves abroad with an existing ASX portfolio. As an Australian resident, the franking credit was a mechanism for recovering corporate tax already paid by the company on your behalf. The imputation system made double taxation impossible for residents. As a non-resident, that mechanism is closed.

Instead, what franking credits do is interact with a different rule entirely: Australian dividend withholding tax. That interaction produces outcomes that are counterintuitive, and the assumption that fully franked means tax-efficient is the most expensive misconception your Australian portfolio can carry.

How the Australia–US Tax Treaty Impacts ASX Shares for US Residents

When an Australian company pays a dividend to a non-resident shareholder, the ATO imposes withholding tax on the payment. The standard statutory rate is 30%. For countries that have a double tax agreement with Australia, the agreement caps the rate at a lower level. Under the Australia-United States Double Taxation Agreement (Article 10), the maximum withholding rate on dividends paid to a US resident is 15%.

So for a US resident holding Australian shares directly, the withholding rate on dividends would ordinarily be 15%.

However, here is where franking intervenes. Under section 128B(3)(ga)(i) of the ITAA 1936, dividends that are fully franked are exempt from Australian dividend withholding tax entirely. Not 15%. Not 5%. Zero.

For a partially franked dividend, only the unfranked portion attracts withholding. If a dividend is 60% franked, the 40% unfranked portion is subject to the 15% treaty rate. The franked 60% portion is exempt.

So a fully franked dividend from an Australian company arrives in your US brokerage or CommSec account with no Australian tax deducted at all. If you are expecting that zero withholding to mean you are ahead, you are looking at the wrong tax authority.

The IRS takes the next step

The United States taxes its residents on worldwide income. If you hold a green card, you are a US citizen, or you meet the substantial presence test (which catches most people on work visas after enough years in the country), your Australian dividends are fully taxable in the US regardless of what Australia does or does not withhold.

Dividends from Australian publicly listed companies can qualify as “qualified dividends” under IRC section 1(h)(11) for most direct shareholders. Australia has a comprehensive income tax treaty with the US that meets the IRS requirements, so Australian companies generally qualify as “qualified foreign corporations.” The tax rate on qualified dividends is 0%, 15%, or 20% depending on your total taxable income. For most professionals and higher-income earners in the US, the rate is 15%.

For example: Your Australian company pays a fully franked dividend.

• Cash received: $1,400
• Franking credit on your statement: $600
• Australian withholding deducted: $0

Therefore, the IRS expects you to report that $1,400 as foreign-source dividend income. At the 15% qualified dividend rate, you owe $210 in US tax.

Your foreign tax credit under Form 1116 covers taxes paid to a foreign government on the same income. The available credit: $0. No Australian tax was withheld. The corporate tax embedded in that franking credit was paid by the company, not by you. The IRS will not give you a credit for a tax you did not pay.

You receive $1,400 in your account and send $210 to the IRS. The $600 franking credit on your statement was information, not money.

Foreign Tax Credits vs Franking Credits on ASX Shares

The asymmetry becomes clearer when you compare an unfranked or partially franked dividend.

Take an unfranked $1,000 dividend from an Australian company. The ATO withholds 15% under the treaty: $150 deducted. You receive $850 net.

On your US return, you report the gross $1,000 (the amount before withholding). US tax at 15% qualified rate: $150. You then file Form 1116 and claim the $150 Australian withholding as a foreign tax credit. That offsets the full US liability. Net additional US tax: $0. Total tax paid across both countries: $150.

For the fully franked $1,400 dividend, the calculation is: zero to Australia, $210 to the IRS, total $210. In dollar terms, less than the unfranked scenario, because the unfranked amount is larger. But the structural point is important. With unfranked dividends, you pay Australia 15% and the IRS credits you for it. With fully franked dividends, you pay Australia nothing, and the IRS takes 15% without offset.

The person who once received a franking credit refund from the ATO is now writing a cheque to the IRS with no foreign credit to reduce it. That is not a catastrophe, but it represents a fundamentally different position from the one you held as a resident, and you need to reflect this in how you manage the portfolio.

Worked Example: ASX Shares and Franking Credits for a US Tax Resident

Sarah moved to San Francisco three years ago on a work visa. She kept her Australian brokerage account with direct shares in several ASX companies and a position in an Australian-listed ETF. She meets the substantial presence test and is fully taxable in the US. Her federal qualified dividend rate is 15%.

Sarah’s largest holding pays a fully franked interim dividend in December:

• Cash dividend received: $1,400
• Franking credit shown on statement: $600
• ATO withholding: $0 (fully franked, exempt under domestic law)
• Australian tax return obligation: none (non-resident, no franking credit benefit)
• US tax: 15% on $1,400 = $210
• Foreign tax credit available: $0
• Out of pocket to IRS: $210

Her second holding pays a dividend that is 60% franked. The 40% unfranked portion attracts the 15% treaty withholding.

• Gross dividend: $1,000
• Unfranked portion: $400
• ATO withholding on $400 at 15%: $60
• Cash received: $940
• US return: report $1,000 gross, US tax at 15% = $150, claim $60 foreign tax credit
• Net US tax: $90
• Total tax paid: $60 + $90 = $150

Now her ETF holding, Vanguard Australian Shares, listed on the ASX. The dividend arrives with a mix of franked and unfranked income.

Ultimately, this is where the structure of the investment matters enormously, and not in a direction Sarah anticipated.

The PFIC problem: why Australian ETFs are a different category of risk

A Passive Foreign Investment Company, or PFIC, is a foreign corporation where 75% or more of gross income is passive income (dividends, interest, gains), or where 50% or more of average assets produce passive income.

Virtually every Australian-listed ETF satisfies this definition. A fund holding ASX shares generates dividends and capital gains. It is a company under Australian corporate law. The income is passive. It is a PFIC.

If you hold ASX-listed ETFs as a US person without making a specific election, the default PFIC rules apply under the “excess distribution” regime. Gains and certain dividend distributions are allocated back across your holding period and taxed as if earned in each prior year, with interest charged on the deferred tax. The result is a tax bill that can substantially exceed what you would have paid under ordinary rates.

Two elections exist to avoid the worst outcomes. The mark-to-market election under IRC section 1296 treats unrealised gains and losses annually, with results taxed as ordinary income. The Qualified Electing Fund election allows you to report your pro-rata share of the fund’s ordinary earnings and net capital gain each year, preserving capital gain treatment on the latter. Both elections require information from the fund that many Australian ETF managers do not readily provide, and both carry their own complexity.

Critically, PFIC stock does not meet the definition of a qualified foreign corporation for dividend purposes. This exclusion means the IRS cannot treat distributions from a PFIC as qualified dividends, regardless of whether Australia and the US have a tax treaty in place. Instead, the IRS taxes them as ordinary income at your marginal tax rate.

The filing obligation is Form 8621. It is required for each PFIC in each tax year where you receive a distribution or recognise a gain on disposal. Failing to file Form 8621 leaves your statute of limitations open indefinitely for those positions. The ATO cannot see your US tax position; the IRS cannot see your Australian holdings. Neither authority flags the omission automatically. The obligation sits entirely with you.

What the portfolio structure should reflect

Australian shares built wealth efficiently when you were an Australian resident. The imputation system was designed for residents. The exemptions, credits, and refund mechanisms assume you are paying Australian tax and that the corporate tax credit reduces your personal tax bill. Remove that assumption and the architecture that made the portfolio efficient changes.

For a US resident, the relevant questions when reviewing an existing ASX portfolio include:

• What is the franking status of each holding?
• What is the PFIC status of any ETF positions?
• What elections have been made, or should be made for those ETFs?
• What is the Form 1116 profile across the total foreign income picture?

These are not one-time questions. They recur every tax year.

Finally, the franking credit on your dividend statement is not a promise. It is an artefact of a system that was built around you being somewhere you no longer are.

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Disclaimer: This article is intended for informational purposes only and does not constitute legal or financial advice. Individuals should consult licensed professionals when seeking guidance regarding their financial circumstances.