Franked Dividend: Definition, Types, Example

What is a franked dividend?

A franked dividend (commonly used term in Australia) is a dividend paid to shareholders with an attached tax credit — a “franking credit” — that represents tax the company has already paid on its profits. The imputation system lets shareholders use that credit to reduce (or sometimes eliminate) the income tax they would otherwise pay on the dividend, which prevents the same company profit being taxed twice at both the corporate and shareholder levels.

Key takeaways

– Franked dividends carry franking (imputation) credits equal to company tax already paid on the dividend.
– Taxable income for the shareholder includes both the cash dividend and the attached franking credit (the “grossed-up” amount).
– Shareholders then offset their tax liability on that grossed-up amount by the franking credit.
– If a shareholder’s tax liability on the grossed-up dividend is less than the franking credit, many Australian resident taxpayers can receive a refund of the excess credit; non-residents generally cannot claim franking credits.
– Dividends can be fully franked (100%) or partially franked (<100%). Companies may be unable to fully frank dividends if their franking account is insufficient.

Understanding franked dividends (how the mechanics work)

1. Company pays corporate tax on its profits (at the company tax rate).
2. Company distributes some after-tax profits to shareholders as a cash dividend.
3. The company attaches franking credits to the dividend that reflect the tax already paid.
4. The shareholder must include the grossed-up dividend (cash dividend + franking credit) in their assessable income when lodging tax.
5. The shareholder receives the franking credit as a tax offset against their income tax liability.

Franking credit formula (for a fully franked dividend)

Franking credit = (Dividend ÷ (1 − Company tax rate)) − Dividend

Example (company tax rate 30%, cash dividend $1,000):

Franking credit = ($1,000 ÷ 0.70) − $1,000 = $428.57
Assessable income = $1,000 + $428.57 = $1,428.57
Tax payable on assessable income depends on the shareholder’s marginal tax rate; then subtract the $428.57 franking credit to find net tax on the dividend (or refund).

Types of franked dividends

– Fully franked: The company has paid enough tax to attach a franking credit equal to 100% of the dividend. Investors receive the full credit.
– Partially franked: Only part of the dividend has franking credits attached because the company’s franking account does not cover the whole amount. The unfranked portion is taxed in full in the shareholder’s hands.

Why franked dividends matter (benefits and broader effects)

– Prevents double taxation: Shareholders are not taxed again (or are taxed less) on profits already taxed at the corporate level.
– Can reduce investor tax liability: Depending on a shareholder’s marginal tax rate, franking credits can reduce tax payable or generate a refund.
– Investment incentives and market effects: By reducing the tax penalty on dividends, franked dividends can make dividend-paying companies more attractive, supporting a broader investment base and potentially stabilizing markets.
– Productisation: Some funds and ETFs have been created specifically around franked-dividend-paying Australian companies.

Real-world numerical example (how tax outcome changes with marginal rate)

Using the $1,000 fully franked dividend example (franking credit $428.57, assessable income $1,428.57):

– If shareholder marginal tax rate = 37%: Tax on assessable income = 1,428.57 × 0.37 = $528.57. Apply franking credit $428.57 → net tax on dividend = $100 (shareholder pays $100).
– If shareholder marginal tax rate = 19%: Tax on assessable income = 1,428.57 × 0.19 = $271.43. Apply franking credit $428.57 → excess credit $157.14 may be refundable (for eligible Australian resident taxpayers).

Practical steps for investors (how to identify, calculate, and claim)

1. Check the dividend statement (or company/ASX announcements):
– The payer’s dividend statement will declare the cash amount and the franking percentage or franking credit attached. The ASX company announcement and broker dividend notices usually include franking details.
2. Gross-up the dividend for tax reporting:
– Add the franking credit to the cash dividend to get the grossed-up amount you must declare as income. Use the formula above to compute the franking credit when only the cash amount and company tax rate are known.
3. Report the dividend and claim the credit on your tax return:
– Include the grossed-up dividend in assessable income and claim the franking credit as an offset. If you use online lodging systems (e.g., myTax) or a tax agent, the dividend statements you receive from companies and your broker will be the primary records.
4. Keep records:
– Retain dividend statements (including the franking details), broker statements, and any PAYG summary or annual tax statements. These are needed if the ATO requests evidence.
5. Understand residency rules:
– Australian resident taxpayers generally can claim franking credits (and may receive refunds of excess credits). Non-resident shareholders generally cannot claim franking credits; check ATO guidance for specific situations (e.g., certain treaty positions or intermediary arrangements).
6. Consider account type and timing:
– Holding franked dividend-paying shares in tax-advantaged structures (e.g., superannuation, where rules differ) can change the effective tax outcome. Dividend timing (ex-dividend date, record date, payment date) affects whether you receive the dividend.
7. Compare yield vs franking:
– Fully franked dividends can be more tax-efficient than higher nominal yields with no franking. When assessing an investment, consider the after-tax yield based on your marginal tax rate.
8. Use financial products thoughtfully:
– Some ETFs or managed funds focus on companies with a history of fully franked dividends. Check fund documentation for franking exposure and the fund’s distribution policy.

Practical steps for company administrators (ensuring correct franking)

1. Maintain accurate franking account records so distributions can be franked legally.
2. Check franking account balance before declaring franking percentages.
3. Disclose franking percentage and franking credit amounts clearly in dividend statements and ASX announcements.
4. Provide annual tax statements for shareholders to make claiming easier.

Common pitfalls and considerations

– Not all dividends are franked. Don’t assume all Australian dividends carry franking credits.
– Partial franking: Some companies cannot fully frank dividends because of insufficient franking credits. That increases tax for shareholders.
– Residency matters: Non-residents usually cannot use franking credits.
– Refund rules and limits: Whether and how much of an excess franking credit is refunded depends on tax residency and the ATO’s rules for the taxpayer type (individual, trust, superannuation, company). Consult the ATO or a tax adviser for specific outcome.
– Company tax-rate changes: The franking credit is calculated based on the company tax rate that applied to the profit; changes to corporate tax rates can affect future franking credits.

Where to find authoritative guidance

– Australian Taxation Office — guidance on “How dividends are taxed” and claiming franking/imputation credits is the primary source for tax rules and procedures.
– Company announcements and dividend statements — for the definitive franking percentage and franking credit amounts on each distribution.
– Fund documentation — for ETFs or managed funds focused on franked dividends (e.g., historical funds that tracked franked dividend indices).

If you’d like, I can:

– Walk through a personalized example using your marginal tax rate and a specific dividend to show the net tax or refund; or
– Help you find companies or funds that historically pay high levels of franking credits.