13 March 2014 // Related Categories: Tips

If you have shares in one or more blue chip companies you might need to make decisions about how you receive your return on investment. So, would you rather receive a fully franked dividend or an unfranked dividend?

Fully franked versus unfranked

Let’s start with a brief explanation. There is an arrangement in Australia that eliminates the double taxation of dividends, known as “franking”. When some dividends are paid out, they are done so with “imputed tax credits” attached to them. These are known as “franked dividends”. The shareholder is then able to reduce the tax paid on their dividend by an amount equal to the imputed tax credits. The idea of this concept is to remove double taxation because the company issuing the dividend has already partially paid tax on the dividend prior to issue.

Exploring the differences with an example

Assume that you have a taxable income in the range $37,000 to $80,000 and therefore your marginal tax rate is 32.5%, plus medicare levy of 1.5%, giving a combined marginal rate of 34%.

Fully franked dividends in action

Using the above scenario, assume you receive a $700 dividend payout into your bank account and a dividend statement showing a fully franked dividend of $700 with a franking credit (sometimes referred to as imputation credit) of $300.

When completing your 2014 income tax return you will have to show both the $700 fully franked dividend received, PLUS the $300 imputation credit as assessable income, and will have the $300 allowed as credit in your tax assessment.

As your marginal tax rate is 34% income tax payable will be $340 ($1,000 @ 34%) less imputation credit of $300 resulting in net income tax payable of only $40.

Unfranked dividends in action

Using the above scenario, assume you receive $700 into your bank account and a dividend statement showing an unfranked dividend of $700, with franking credit of NIL.

The big difference is found when completing your income tax return.

You will only have to show the $700 unfranked dividend that you received, which gives the impression of a beneficial result. However with an unfranked divided you are not entitled to any franking credits and at a marginal tax rate of 34%, your income tax payable will be $238, much higher than the $40 payable in the first example.

What this means to you

Results will vary depending on your tax rate but from the examples above you can see that many income earners, particularly lower income earners, will benefit greatly by paying less tax on fully franked dividends. Not all companies pay fully franked dividends and the best option for you will depend on your individual circumstances. Please feel free to drop us a line if you would like to discuss this further.

Comments: 25 // Share:

ANUBHAV ASATI // 19/04/2015 9:48 AM

could you please share an example where franking ( 60 %) and unfranking ( 40%)

Brian // 17/05/2015 11:24 PM

Thank you for the explanation between franked and unfranked dividends. Am I correct in thinking in the above example that the imputation credit $300 is the 30% tax the company has paid.

So in the unfranked situation, where no tax has by paid by the company, why is the dividend only $700 and not $1,000

Ben // 08/04/2017 8:00 PM

@Brian. Yes I believe if the company pays an unfranked dividend then instead of sending 30% company tax to the ATO they pay 100% of dividend profit to the shareholders for them to sort out out the tax. Otherwise where has the franking credit disappeared to?. It pretty much makes the authors above scenarios irrelevant.

Ali // 26/04/2017 11:33 AM

When you receive an unfranked dividend – this means that company was not able to give you any imputation credits on the money you are receiving. The company has not already paid tax on the money you are receiving.

Unfranked dividends are common when you invest in companies which do not pay much company tax because they have a lot of tax deductions available to them – so while they have money they are able to pay to their investors, they do not pay tax. If a company does not pay tax they are not able to give you a credit for tax they have already paid. This results in any profits you receive being Unfranked dividends.

Ali // 26/04/2017 11:33 AM

When you receive an unfranked dividend – this means that company was not able to give you any imputation credits on the money you are receiving. The company has not already paid tax on the money you are receiving.

Unfranked dividends are common when you invest in companies which do not pay much company tax because they have a lot of tax deductions available to them – so while they have money they are able to pay to their investors, they do not pay tax. If a company does not pay tax they are not able to give you a credit for tax they have already paid. This results in any profits you receive being Unfranked dividends.

irene // 14/09/2017 7:20 AM

I am utterly confused. For years I have been receiving franking credits from IAG but the franked amount is always - almost double the franking credit I receive. Can I claim this amount through the ATO or just contact the company to have it added to the credit I receive.

Jax // 10/11/2017 11:34 AM

The above example is misleading. The total amount of tax paid on company profits in the hands of shareholders is usually the same, irregardless of whether franked or unfranked dividends.

Using the above example, the company makes a $1,000 profit. It pays tax at 30% on the profit. It distributes $700 cash + $300 franking credit to the shareholder. The shareholder has a total income of $1,000 from the company. The $1,000 is added to their total income from all sources. The applicable tax is calculated on all of the income. From the tax payable figure, $300 is deducted because **this tax has already been paid on behalf of them by the company**.

Let's say that they are in the 34% tax bracket. $1,000 x 34% = $340 tax payable less the $300 already paid to them.

The net benefit is $700 cash - $40 tax = $660.00 after-tax profit to the shareholder.

The other scenario: Company makes $1,000 profit. It decides to pay an unfranked dividend. It pays no corporate tax and distributes the entire $1,000 as a dividend (cash). The shareholder receives $1,000 cash. Includes it in his/her tax return. Calculates tax. With no franking credits attached, the calculated tax, is the final tax payable.

Again, assuming that the marginal tax rate is 34%, $1,000 x 34% = $340 tax. The net benefit is then $1,000 cash - $340 tax = $660.00

The outcomes are the same.

The only way the scenario described by the author makes sense is if the company had carried forward ("surplus") franking credits that it decided to attach to the dividend.

Chris Hopkins // 20/03/2018 1:14 PM

Well done Jax: a true and easily understandable comparison.

Am I right in suggesting that unfranked dividends will rise in popularity if that arch parliamentarian, Shorten, is able to end franking credit cash rebates; the tax payable on the unfranked dividends would offset any unused credits those that are franked.

I will value any frank comments on this suggestion.

Paul Holt // 04/04/2018 4:08 AM

Chris Hopkins is spot on re a greater use of unfranked dividends.

But will the larger companies give their investors the option of having franked or unfranked dividends?

Paul Holt // 04/04/2018 4:12 AM

Chris Hopkins is spot on re a greater use of unfranked dividends.

But will the larger companies give their investors the option of having franked or unfranked dividends?

Joe // 02/05/2018 2:07 AM

Thank goodness for these comments section, as I agree with Jax's scenario. Read the article and the example given clearly wasn't really apples with apples.

rudolfvan // 04/09/2018 6:33 AM

if the imputation credit is the tax that the company paid on the dividend + imputation credit then the dividend should be tax free when both company and personal tax are the same.

the imputation credit can't be claimed this way.

whatdoctor // 18/02/2019 11:48 PM

I am not sure if the company has the choice of paying the tax. To not pay the tax, they must have enough deductions to offset their tax - basically meaning they made no taxable profit - yet are still able to pay a dividend. I guess that is why unfranked credits are rare.

Bill Mapleston // 21/02/2019 1:33 AM

Thanks to all above as I am on a learning curve here. But tell me, in the cases of people on 19c and zero marginal tax rates, where the tax paid is less than $300 in the above calculations, what is the logic? with Labor's plan, the 30% company tax is sacrosanct and is the minimum acceptable, so no negative tax rebates. The current system sees the effective tax rate varying zero to about 50% according to the marginal tax rates of the individual shareholders. So which system is logically/ethically correct?

Farmerfred // 21/02/2019 2:25 AM

I am glad others have questioned the maths in the original explanation of franked and unfranked as I also struggled to see that it was a fair comparison. Jax explained it very well. My issue is if Labor abolish franking credits for those that don't pay tax because of low income, they will be unfairly treated by having paid 30% tax on dividends when their tax liability may be zero.

For instance, I am a self funder retiree with a tax free income from super , a few dollars earning interest, and a few Wesfarmers shares.

My combined taxable income from interest and shares is below the $18,200 taxable threshold so I am not required to pay any tax at all. If Shorten has his way I will effectively be paying 30% tax on my WF share dividend, even though my income is below the threshold. Very unfair.

I could opt for shares that are not fully franked but would rather stick with what I have.

Interestingly it seems only shares are being targeted. I can receive income from interest (without any deduction) and pay no tax on it. I could do a bit of casual work and provided I stay under the $18,200 threshold still pay no tax on that.

Why only shares?

Maybe we need the option of receiving either franked or unfranked dividends and then sort out our own tax.

Bill Mapleston // 21/02/2019 5:21 AM


It seems to me it is a philosophical rather than technical argument. If there is to be a 30% tax rate on companies, and that is the everyday understanding, then that first 30% of the net profit belongs to the gov't and not to you. You of course pay no tax on the 70% that you receive as the cash dividend. I tend to think the existing system will disappear under Labor and never return, so maybe people will move share investments into Super funds where they can.

Property investments outside of Super have no particular advantages with tax paid on earnings as a per tax brackets regardless of age.

Bill Mapleston // 22/02/2019 4:12 AM

Ignore my above comments. So called Company Tax is paid by the shareholders at their marginal rate (so should be called Shareholder's Tax?). I think Keating brought in imputation to avoid double taxation and Costello extended that with the cash back scheme which meant zero 'company tax' paid by low income shareholders. Labor's scheme would return the minimum 30% (or 19%?) tax threshold (I think). Pretty arbitrary change I guess for those caught in that net.

Tony Burgess // 05/03/2019 8:28 PM

I would like to get a simple Yes/No answer to a question I have about fully franked share income. A company pays tax on their profit and issues the share as fully franked and then the shareholder claims the full franking amount and gets back the tax paid by the company - Does this mean no tax is ultimately paid on that income?

Jim Lim // 23/04/2019 7:34 AM

Could someone enlighten me as to whether or not the unused excess franking credits can be utilised to offset the 2% medicare levy.

John Roberts // 02/05/2019 11:47 AM

I am also interested in Tony Burgess question as this is claimed by some as being highly unethical that some retirees through investments in franked shares and receiving cash refunds mean that companies are in effect paying no tax on their profit., but if franked credits are after tax how can this be?

bill van poppel // 06/05/2019 1:54 AM

if the company distributes all of the annual profit to the share holders than the individual share holder has to add this income to their other income and pay tax on the marginal rate applicable

eg if the company pays $1000 of unfranked dividend than the individual pays marginal tax on the full $1000 if the company pays $300 in company tax it only pays $700 to the share holder

This means that the shareholder is really paying the tax otherwise they would have received $1000 from the company so for labour to say that the shareholder has not paid any tax is a blatant lie they have the company pay the tax on behalf of the shareholder.

The amount of tax payable is depending on the total income of the individual

The situation for the company is the same pay $300 to the ATO and $700 to the shareholder or pay the whole $1000 to the share holder is the same to the company

James // 06/05/2019 4:00 AM

Jax, congratulations for being one of the few that understands how ridiculous it is to compare a $700 franked dividend with a $700 unfranked dividend. You are completely right, this is an inane and foolish comparison. Ultimately, the shareholder, as you stated, receives the same. If a company hasn't paid corporate tax of 30% it doesn't have $700 to distribute, it has $1000 (if comparing like earnings).

I am not sure why this is so hard for writers to outline. It amazes me how many professed experts talk about how crucial franked dividends are for pensioners. As if the pensioner would care if they received $1000 unfranked or $700 fully franked. It's all the same... so stop trying to oversell franked dividends as if they give you something they don't,

Ultimately, it comes down to this. You either get a LARGER sum of money (unfranked) or get a SMALLER amount of money franked. Ultimately, you still pay the same amount of tax - receive the same net amount.

Can someone please stop these experts from misinterpreting the franking rules!

James // 06/05/2019 4:16 AM

Bill van poppel,

Labour's policy is ultimately flawed. I think all investors realise this.

Why? Because the removal of franking credit refunds for persons who do not pay tax is easily circumvented.

Already, most listed investment companies have flagged a change to listed investment trusts in the event the policy is adopted. This means all net income will be distributed to members and will circumvent the inability to obtain refunds for franking credits.

Likewise, you will see most companies distributing gross (before company tax) to members. In this scenario, as you outlined the person would receive the total amount (pre company tax).

P.S. I am still really annoyed at financial experts continually comparing franked dividends with unfranked dividends, yet not taking into account if a company doesn't pay tax there is more money to distribute to members. The above example, of $700 franked and $700 unfranked... does my head in...

James // 06/05/2019 4:41 AM

John Roberts,

If the individual is a below the tax threshold for paying tax (someone earning below $18,200) and they receive a franking credit refund, then yes this means the company's earnings are not taxed at all (for that portion of the franked dividend*).

How? If a company pays 30% tax to the government and the government then gives that amount, as a refund, to a person not paying any tax... what is left? Nothing.

In essence, its true. Although the company is paying company tax, it is subsequently being refunded to the low income earner. In effect, the government receives no revenue from this arrangement. It must be noted, the company doesn't benefit from this arrangement... as they are still paying the requisite company tax. It is the subsequent refund to a person not paying tax which creates the situation, where in effect no company tax is collected.

The big loser is the government...

I am not going to comment on what is ethical or right. It ultimately comes down to whether you think company profits should be taxed at the company level or the shareholder level. Ultimately, it may be the case the country can't afford to have company earnings not being taxed.

There are arguments, on here, that by not receiving the 30% refund retirees are paying the corporate tax. Alternatively, you could view it as purely the company paying the corporate tax rate and the government choosing not to pay this revenue out.

James // 07/05/2019 1:05 AM

I thought I would add there seems to be some confusion around when a company can issue franked and unfranked dividends. As was pointed out by "what doctor" a company can't arbitrarily issue franked or unfranked dividends. It doesn't work this way.

For example, and in relation to the examples above, simply because a company is paying a $700 franked dividend, doesn't mean they could have elected to pay a $1000 unfranked dividend. The ability to issue unfranked dividends does come down to available deductions, offsets etc.

A company would never be able to tell the ATO they didn't pay corporate tax on their profiits because they decided to issue an unfranked dividend (for net profit) to its shareholders. It doesn't work this way.

Accordingly, you can't logically state a company that issues a $700 franked distribution could have issued a $1000 unfranked dividend. A company doesn't arbitrarily elect this. It comes down to the tax position of the company after numerous considerations, including tax ultimately payable.

Notwithstanding, it is still illogical to compare both a $700 franked and $700 unfranked dividend, because ultimately you are talking about two completely different situations.

There is one situation where you can compare the ability to issue franked dividends, or pass through all funds unfranked. The example being Listed Investment Companies v Unit trusts. The whole reason Listed Investment Companies are losing support is because of Labour's proposal. It is the same reason LICs are looking to convert to listed investment trusts. This will ensure all unfranked dividends, CGT is passed through to the investor, rather than being taxed at the LIC level.

Add Comment