Franked Dividend Credits impact to taxable income
Author: Duncan Warnock CPA | June, 2025
When a taxpayer receives a dividend from a company it can be franked, unfranked or a mixture of both.
Franking credits arise for shareholders when certain Australian-resident companies pay income tax on their taxable income and distribute their after-tax profits by way of franked dividends. These franked dividends have franking credits attached. Franked dividends are received either directly as a shareholder or indirectly as a beneficiary of a trust.
If a company has never paid any company tax then they will not have earned any franking credits to apply to a company dividend to a shareholder receiving a dividend. Further to that if they have never paid any company tax then that would typically means they have not earned sufficient company profits in order to be able to pay a company dividend to its shareholder(s).
3 alternative comparison scenarios are provided below to illustrate how taxable income & tax credits are impacted when franked dividends are received vs not received.
*Note: The scenarios are illustrative only and does not take into account individual circumstances such as HECS debt, marital status and private health insurance.
Scenario 1 - Gross Wages $60,000 & No Dividend income
Scenario 1 - Taxpayer earns $60,000 Gross Wages in 2024 tax year where the employer has deducted sufficient tax withheld ($11,067) so when their 2024 tax return is prepared the tax return result is $0 - Nil Refund. Their taxable income is $60,000
Scenario 2 - Gross Wages $60,000 & $40,000 Unfranked Dividend
Scenario 2 - Taxpayer earns $60,000 Gross Wages in 2024 tax year where the employer has deducted sufficient tax withheld ($11,067) so when their 2024 tax return is prepared the tax return result is $0 - Nil Refund IF they didnt also receive an UNFRANKED DIVIDEND from a Company that they are a Shareholder of. The UNFRANKED DIVIDEND is $40,000
How will the DIVIDEND impact their Personal Tax Return ?
NOTE 1: The Taxable income is increased by the amount of the $40,000 Dividend - $40,000
Taxable income is $100,000 ($60,000 Gross Wages + $40,000 Unfranked Dividend)
No income tax as yet has been paid on the Unfranked Dividend so when the tax return is prepared the individual taxpayer owes $13,900 of income tax on the Dividend received. As the dividend is UNFRANKED the individual taxpayer receives no imputation credits (franking credit tax offsets on the dividend)
Scenario 3 - Gross Wages $60,000 & $40,000 Franked Dividend
Scenario 3 - Taxpayer earns $60,000 Gross Wages in 2024 tax year where the employer has deducted sufficient tax withheld ($11,067) so when their 2024 tax return is prepared the tax return result is $0 - Nil Refund IF they didnt also receive a FRANKED DIVIDEND from a Company that they are a Shareholder of.
The FRANKED DIVIDEND is $40,000 (the dividend franking credit attached is based on 25% company tax being paid by the company). The Franking credit (imputation credit) is therefore $13,333
How will the DIVIDEND impact their Personal Tax Return ?
NOTE 1: The Taxable income is increased by the amount of the $40,000 Dividend - $40,000
NOTE 2: The Taxable income is ALSO increased by the amount of the Franking Credit - $13,333.33
NOTE 3: The taxpayer receives a TAX CREDIT equal to the Franking Credit for - $13,333.33
No income tax as yet has been paid on the Franked Dividend so when the tax return is prepared the individual taxpayer does owes some extra income tax on the Dividend received.
As the dividend is FRANKED the individual taxpayer does receive imputation credits (franking credit tax offsets on the dividend)
Taxable income is $113,333.33 ($60,000 Gross Wages + $40,000 Unfranked Dividend + Franking Credit $13,333.33)
Tax Return Result is $5,166.88 Payable (they are essentially paying $5166.88 income tax (12.9%) on the $40,000 franked dividend due to the franked tax credits even though the taxpayers marginal rate of income tax in 2024 FY is 34.5%)
Comparison to $40,000 Unfranked Dividend (Scenario 2) - Tax payable in this Scenario 3 is $5,166.88 Payable compared to $13,900 income tax payable for the $40,000 Unfranked Dividend. In both Scenarios 2 & 3 the individual taxpayer receives the $40,000 into their bank accounts for the Dividend.
This tax credit (Franked Dividend Imputation Credit) reduces the amount of income tax payabe in the personal tax return. This is similar to the effect of a tax credit when an employer deducts income tax withheld from an employees wages. However a key difference is that the individual taxpayer has not had this $13,333 amount deducted from the Dividend payment they received (they recieved the $40,000 dividend into their bank account)
