Franked Dividend

Franked Dividend: Definition and How It Works

Key takeaways
* A franked dividend is an Australian dividend that carries a franking credit — a tax credit representing tax the company has already paid — to prevent double taxation.
* Shareholders include the dividend plus the franking credit in their assessable income and claim the franking credit as a tax offset; the shareholder’s marginal tax rate determines any additional tax payable (or reduction).
* Franked dividends can be fully franked (100% credit) or partially franked (only part of the dividend carries a credit).
* Franking encourages dividend-paying behaviour and can reduce the tax disadvantage of dividends relative to reinvestment.

What is a franked dividend?
A franked dividend is a payment to shareholders that includes an attached franking credit reflecting corporate tax already paid on the company profit from which the dividend was drawn. The system is intended to avoid double taxation — once at the corporate level and again at the shareholder level — by giving shareholders a credit for tax the company has paid.

How franking credits work
* The shareholder receives the cash dividend and a franking credit statement showing the tax paid by the company.
* For tax purposes, the shareholder declares the “grossed-up” dividend (cash dividend + franking credit) as assessable income.
* The shareholder then claims the franking credit as a tax offset against their tax liability. The net tax consequence depends on the shareholder’s marginal tax rate relative to the company tax rate.

Example calculation (company tax rate 30%)
Formula:
Franking credit = (Dividend ÷ (1 − Company tax rate)) − Dividend

If a company pays a fully franked cash dividend of $1,000:
Franking credit = ($1,000 ÷ 0.70) − $1,000 = $428.57

The shareholder declares $1,428.57 as assessable income and claims $428.57 as a tax offset. The final tax outcome depends on the shareholder’s marginal rate (they may owe more if their rate is higher than 30%, or pay less/receive a refund if lower).

Types of franked dividends
* Fully franked: The company has paid tax on the profit at the full company tax rate, and shareholders receive franking credits equal to the full amount of company tax attributable to the dividend.
* Partially franked: The company has paid insufficient tax (for example, due to carry-forward losses or deductions), so only part of the dividend carries a franking credit. The unfranked portion carries no credit and is taxable to the shareholder without offset.

Benefits of franked dividends
* Reduces double taxation on corporate earnings distributed as dividends, aligning investor tax treatment more closely with income that has not been taxed at the corporate level.
* Encourages distribution of profits as dividends rather than exclusively reinvesting, which can support broader investor participation and market stability.
* Helps make dividend-paying companies more competitive with firms that do not pay dividends.

Practical example
An exchange-traded fund (ETF) formerly known as the VanEck Vectors S&P/ASX Franked Dividend ETF tracked Australian companies that paid 100% franked dividends. The fund highlighted investor demand for vehicles focused on franked-income streams.

Reporting and practical notes
* Shareholders should retain dividend statements showing cash dividends and franking credits for tax reporting.
* The net tax impact varies by individual circumstances; consult tax guidance or a tax adviser for specific consequences.

Further reading
* Australian Taxation Office — How dividends are taxed
* VanEck — Historical fund information on franked-dividend strategies