Fully Franked Dividends vs Unfranked Dividends: What Australian Investors Need to Know
Published on July 23, 2025
Many Australian investors find the difference between fully franked and unfranked dividends confusing, especially when it comes to how these dividends affect their income tax and tax return. Understanding these terms is important for making informed investment decisions and managing your actual tax payable.
How the Australian Dividend Imputation System Works
Australia’s dividend imputation system was created to prevent double taxation of company profits. Previously, profits were taxed as corporate income and then again as dividend income when paid to shareholders, increasing the overall tax burden. With the current system, when an Australian company pays company tax on its profits, it can attach franking credits to dividends paid to shareholders. These franking credits reflect the tax already paid by the company and serve as a tax credit for the shareholder.
When you receive franked dividends, both the cash dividend and the attached franking credits are included in your taxable income. The franking credit acts as a tax offset, lowering your tax liability. If your franking credits are greater than your tax payable, you may receive a tax refund from the Australian Tax Office.
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What Are Fully Franked Dividends?
A fully franked dividend is a payment to shareholders that includes the highest level of franking credit, showing the company has already paid the full corporate tax rate on the profits before distributing them. When you receive a fully franked dividend, it comes with a franking credit, which reflects the tax the company has already paid.
For instance, if you receive a $70 fully franked dividend and the company tax rate is 30%, a $30 franking credit is attached. This means your taxable income from the dividend is $100. When you complete your tax return, you include both the cash dividend and the franking credit as income, but you can also use the franking credit to reduce your income tax.
If your marginal tax rate is below the company tax rate, you may get a refund for any extra franking credits. If your tax rate is higher, you may need to pay more tax on the dividend income. This approach helps make sure the same income is not taxed twice.
Partially Franked and Unfranked Dividends
Not all dividends are fully franked. Sometimes, companies issue partially franked dividends or unfranked dividends, depending on how much company tax has been paid on the profits used for dividend payments.
Partially Franked Dividends
These dividends have only a portion of the franking credit attached. This happens when the company has paid some, but not all, of the required company tax on the profits used for dividends. Investors receive a partial tax offset and must pay income tax on the unfranked portion at their marginal tax rate.
Unfranked Dividends
These dividends are paid from profits on which no Australian company tax has been paid. There is no franking credit attached, so the entire dividend is included in your taxable income, and you pay tax on it at your marginal tax rate with no tax offset or refund available.
Why Franking Credits Matter for Investors
Franking credits are a key feature of the Australian tax system that can significantly affect your after-tax returns. When you receive franked income, the corresponding franking credits reduce your tax liability, and in some cases, result in a tax refund if your tax credits paid exceed your tax payable.
For example, retirees or investors with a lower marginal tax rate than the company tax rate may receive refundable franking credits, boosting their after-tax profits. This is especially valuable for superannuation funds in pension phase, where the tax rate may be 0%, making all franking credits refundable.
On the other hand, unfranked dividends do not offer these tax advantages. Since there is no tax credit attached, you pay income tax on the full amount of the dividend income, which can reduce your overall return compared to fully franked dividends.
Calculating Franking Credits and After-Tax Returns
When you get your dividend statement, it lists the cash dividend, the franking percentage, and the franking credit included. To work out your total taxable income from the dividend, add the cash dividend and the franking credit together. The franking credit is used as a tax offset.
For example, if you receive $1,000 in fully franked dividends and $428.57 in franking credits (using a 30% company tax rate), your taxable income from this dividend is $1,428.57. You can claim the $428.57 as a tax offset when you complete your tax return.
If you receive $1,000 in unfranked dividends with no franking credit, your taxable income is $1,000, and you pay tax on this amount at your marginal tax rate without any tax offset.
How to Claim Franking Credits on Your Tax Return
To use franking credits, you need to report both your dividend income and the franking credits on your tax return. The Australian Tax Office requires you to include the cash dividend and franking credit in your taxable income and to claim the franking credit as a tax offset, which lowers your tax liability. If your franking credits are more than your tax payable, you may receive a refund.
You also need to meet the related payments rule and hold the shares for at least 45 days to be eligible for franking credits. This is to make sure the tax benefit goes to those who actually hold the shares.
Franked and Unfranked Dividends: A Practical Comparison
Let’s compare the after-tax outcomes for fully franked, partially franked, and unfranked dividends paid to shareholders at different marginal tax rates.
Suppose you receive $1,000 in dividends:
Fully Franked Dividend (30% company tax rate):
Cash dividend: $1,000
Franking credit: $428.57
Taxable income: $1,428.57
Tax offset: $428.57
Depending on your marginal tax rate, you may pay additional tax, pay no extra tax, or receive a tax refund.
Partially Franked Dividend (50% franked):
Cash dividend: $1,000
Franking credit: $214.29
Taxable income: $1,214.29
Tax offset: $214.29
You pay income tax on the unfranked portion at your marginal tax rate.
Unfranked Dividend:
Cash dividend: $1,000
No franking credit
Taxable income: $1,000
No tax offset
You pay income tax on the full amount.
This comparison shows the tax advantages of franked dividends, especially for investors with a lower tax rate than the company tax rate.
Common Mistakes and How to Avoid Them
Many investors miss out on tax benefits by not claiming excess franking credits or by not meeting the holding period requirements. It’s important to keep accurate records of all dividend payments and franking credits received, and to include them correctly on your tax return. If you’re unsure, a tax professional can help ensure you claim all eligible tax credits and avoid errors that could affect your tax refund or increase your tax liability.
Final Thoughts
Understanding the difference between fully franked dividends, partially franked dividends, and unfranked dividends is important for every Australian investor. Franking credits attached to franked dividends can reduce your tax burden, provide a valuable tax offset, and sometimes result in a tax refund. Unfranked dividends, on the other hand, do not offer these benefits and may result in more tax payable.
When assessing investments, consider the type of dividends paid, the company tax rate, and your own marginal tax rate to determine the after-tax value of your dividend income. This approach will help you make better investment decisions and potentially improve your after-tax returns.
Lukasz Klekowski
