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As a shareholder, you are probably curious about the tax implications of dividends. In Australia, dividends are taxed within a system designed to stop company profits from being taxed twice. This means that once a company has paid tax on its profits, any dividend income paid to shareholders comes attached with a tax credit to offset the value of tax already paid on that income by the company. These tax credits are also known as franking credits or imputation credits. Because the amount and rate of tax paid by the company can vary, dividend income distributed to shareholders is considered either fully franked, partially franked, or unfranked, with different tax implications for investors. This article sets out what franked and unfranked dividends are and the key differences between them for shareholders.

What Are Franked and Unfranked Dividends?

Type of dividend

Description

Franked dividend

You will receive this if the company you have shares in has paid tax.

Partially franked dividend

You will receive this if a company you have shares in has paid tax on some of its earnings, but not all.

Unfranked dividend

You will receive this if the company you have shares in has not paid tax at all.

Times when a company may pay very little, or no tax, may include:

  • when they have large tax deductions available to them;
  • when they do not make a profit for the year;
  • if they are carrying forward losses from previous years; or
  • if they are based internationally.

What Are the Tax Implications for Shareholders?

The type of dividend you receive will impact the amount of tax you are required to pay at the end of the financial year.

Franked dividends include a tax credit called a franking or imputation credit. This is equivalent to the amount of tax paid by the company for your portion of share ownership, so you can use this credit to reduce your taxable income. 

Unfranked dividends carry no tax credit. Since the company has not paid tax on the amount you have received, you will have to pay income tax on the amount. 

Franking Credits and Your Marginal Tax Rate

As of 2021, the company tax rate is 30% for all companies not eligible for the 26% lower base rate, and individual marginal tax rates range from 0-45%, which means the impact on shareholders can vary. For example: 

Marginal tax rate

Tax implication

>30%

The franking credit amount is deducted from the amount owed using the shareholders’ marginal tax rate, with tax paid on the difference.

30%

The dividend is not taxed.

<30%

The ATO refunds the franking credit amount to the shareholder. 

Not sure if your dividends are franked or unfranked? Check your dividend statement. If it is franked, you will have a franking credit amount listed. Depending on the company, it may also be referred to as an imputation credit. 

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Example of a Fully Franked Dividend

Company ABC pays a tax rate of 30% and has decided to pay investors fully franked dividends. It pays you a franked dividend of 70 cents per share and you own 100 shares, so you receive a total payment of $70. You also receive a franking credit of $30 to reflect the amount paid in tax on your shares. 

Franked dividend amount $70
Plus: Franking credit$30
Balance$100

You will receive $100 in total dividend income.

Example 1: If your marginal tax rate is 20% (less than 30%)

Tax on dividend income (20% x $100)$20
Less: franking credit $30
Balance$10

You will receive a refund of $10.

Example 2: If your marginal tax rate is 45% (greater than 30%)

Tax on dividend income (45% x $100)$45
Less: franking credit$30
Balance$15

You will need to pay $15 in tax. 

Depending on your tax situation, franked dividends can come with tax benefits for shareholders. You could get a refund, pay no additional tax, or receive a rebate. Therefore, investors can potentially leverage franking credits as part of their broader income investment strategy. 

Example of an Unfranked Dividend

We will now revisit the above example as an unfranked dividend to highlight the key differences between the two.

Company ABC has decided to pay unfranked dividends and pays you $70. You receive no franking credits because no tax has been paid. 

Unfranked dividend amount$70
Total dividend income$70

Example 1: If your marginal tax rate is 20% (less than 30%)

Tax on dividend income (20% x $70)$14
Tax payable$14

Example 2: If your marginal tax rate is 45% (greater than 30%)

Tax on dividend income (45% x $70)$31.50
Tax payable$31.50

You can also be paid partially franked dividends by a company. Because tax has been paid on some but not all of the dividend, you will receive a credit for only part of this income. 

Key Takeaways

The key difference between franked and unfranked dividends for shareholders lies in the tax implications. With many ASX-listed companies regularly paying dividends, it is important to keep track of your shares to help you understand your obligations at tax time. You can use portfolio tracking tools such as Sharesight to track dividend income, franking credits, and calculate portfolio tax obligations, making for a simpler process come tax time. 

Frequently Asked Questions

What are dividends?

Dividends are a sum of money that a company pays regularly to its shareholders out of its profits.

How do I know if my dividends are franked or unfranked?

You can find out this information by checking your dividend statement. If it is franked, you will see a franking credit amount.

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