Dividend Imputation and Franked Dividends Explained

A dividend is essentially a distribution of profit to a shareholder, whether that is from a private business or listed company. Dividend imputation is the system in Australia where the company paying the dividend “imputes” or credits to the shareholder the amount of tax paid on the dividend the shareholder receives. These dividends that have had tax paid on them are called “Franked Dividends”. If tax has been fully paid at the 30% company rate then they are called “Fully Franked Dividends”, tax paid at less than 30% are called “Partly Franked Dividends” and if no tax has been paid then they are “Unfranked”.

When you receive these dividend’s they are classed as income and need to be declared when completing your tax. If you have a fully franked dividend and are in the 30% tax bracket there will be no additional tax payable. If you are on the top marginal rate of 45%, then an additional 15% tax (plus medicare levy) will be payable and if you are on the 15% marginal rate you will actually get a refund of 15%.

If a company you invest in has net earnings of $1000 and they pay the company tax of 30%, making $300 there will be $700 distributed. The $700 would be credited to your account or a cheque sent. When you get your dividend statement it will show a distribution of $700 to you, (the shareholder) along with a fully franked credit of $300, making the amount to be declared on your tax as $1000. If you earn $50000pa then you are in the 30% tax bracket and would have to pay 30% of the $1000, being $300 but the franking credit of $300 offsets this so there is no tax payable. If you earn $25000 you only pay 15% tax, hence you will get a tax refund of $150.

Sounds confusing but effectively whatever the company tax paid on the funds distributed then you will get a credit for this amount and depending on your marginal rate as to whether you will get a refund, pay no tax or pay a bit extra.