What is a Franked Dividend versus an Unfranked Dividend?

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Dividends are sums of money paid regularly (ideally on a quarterly basis) by a company to its shareholders out of their profits. But do you know that there are 2 types of dividends?

What is a Franked Dividend versus an Unfranked Dividend blog image

What is a Franked Dividend versus an Unfranked Dividend?

Here are 2 types of dividends: Franked Dividends and Unfranked dividends

  • A Franked Dividend means the dividend has a tax credit attached to them whereas
  • An Unfranked Dividend does not have a tax credit attached to it.

A Franked Dividend increases the return substantially. Dividend imputation was introduced in 1987 to end the double taxation of company profits. Under this new system, tax paid by companies was attributed or imputed to investors.

When companies pay part of their earnings in the form of dividends, shareholders pay tax on the income at their marginal tax rate. But if the company has already paid tax on the income at the company level, the tax office gives shareholders a personal tax credit called a franking credit.

Companies pay tax at 30% which leaves 70% cash which can be paid as a dividend to shareholders.

If it’s a Franked Dividend, it will include a credit of 30% which represents the tax that has already been paid by the company.

 When investors fill in their tax return, they declare a grossed-up dividend of $1, by adding the franking credits (30 cents) to the cash (70 cents) they already received.

If you pay tax at the superannuation rate of 15¢ in the dollar, you will receive a 15¢ tax refund because the company has already paid 30¢ on your behalf. This will give you a grossed-up (after-tax) dividend of 85¢ (the original 70¢ dividend plus 15¢ tax rebate).

If you pay tax at the top marginal rate, you will end up paying tax of just 16.5¢ (46.5¢ less the 30¢ already paid at the company level). You end up with an after-tax dividend of 53.5¢ (the original 70¢ dividend less 16.5¢ in tax).

Dividends can be fully or partly franked, depending on the amount of tax the company has already paid.

There are no credits for tax paid on overseas earnings, so a company that earns its income overseas or pays no tax in Australia pays unfranked dividends.

Some banks are paying dividends of 9% after franking credits are taken into account which is a lot better return than putting your money with them as a deposit which may currently be returning you 1%-2% interest.

Click here to learn why ALP’s proposed policy changes on Franking credits could have cost them the 2019 Australian Federal Election.

For more information about franked and unfranked dividends, visit this page on the www.chan-naylor.com.au website or contact your nearest Chan & Naylor accountant to discuss your circumstances in relation to this matter.

If you would like to know more about franked and unfranked dividends, you can click here to know more about Chan & Naylor services. You can leave your details here and we can schedule you for a free consultation. We’ll contact you to explain more.

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Chan & Naylor Group has national offices in Brisbane and Capalaba in Queensland, Melbourne and Moonee Ponds in Victoria, East Perth in Western Australia, and South West Sydney, Parramatta, Pymble, North Sydney, and Sydney in New South Wales.

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Ed Chan – Founder & Non-Executive Chairman Chan & Naylor Accountants


Disclaimer: This article contains general information; before you make any financial or investment decision you should seek professional advice to take into account your individual objectives, financial situation and individual needs. Click for more detail regarding this disclaimer.

 
 
 
 

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16 responses to “What is a Franked Dividend versus an Unfranked Dividend?”

  1. ig says:

    I was suggested this web site by my cousin. I am not sure whether this post is written by him as nobody else know such detailed about my
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  2. Martin Crawford says:

    If receive UNFRANKED dividends from Shares as a Retiree & under the Tax income PA of around $25k…..does that mean no tax applies on the dividend for my TAX RETURN ?
    Thank you

  3. Joe says:

    Doesn’t really talk much about unfranked div’s. What is the advantage for a company in either case, and how does an unfranked div eventuate (i.e. is it a distribution of income as an expense before the company lodges a tax return?).

    • Chan & Naylor says:

      Dear Joe
      An unfranked dividend represents company profits paid to shareholders which has no tax credits attached to the dividend.
      All dividends whether franked or unfranked are not a tax deductible expense to the company.
      It’s paid as a profit distribution but after tax is paid.
      So if $100 profits is made and tax of $30 has been paid by the company leaving $70 Net Profit the company can pay the whole $70 as franked dividends or partly as unfranked or it may decide to only pay part of the $70 as a dividend whether franked or unfranked.
      This is all disclosed in their tax returns but it’s an after tax consideration.
      Why would the company pay franked versus unfranked. ?

      Normally if the company has paid company tax, the tax is held in an account called a Franking Account and these are owed to the shareholders.
      So it would pay a franked dividend to pass these credits back to the shareholders. There is no advantage to the company in holding onto them.
      Why would a company pay an unfranked dividend ?
      Some portion of the Net Profit of the company may attract no tax. Hence these can be distributed out with no tax credits known as unfranked dividends.
      When can a company earn income that has no tax ?
      Some expense items such as depreciation or amortization or sale of an asset that maybe exempt from tax.

      These form the basis of dividends that are paid as unfranked dividends.

      If you receive a franked dividend of 5% that’s the equivalent of a gross dividend before tax of 7.15% gross.

      To work it out you simply divide 5% by 0.70 (assume company tax at 30%)

      Hope that helps.

  4. Faraz says:

    I need a little help, if possible. I am stuck to lodge tax return due to one company shares. Appreciate, if you can advise.

    If a company does not show franked/unfranked amount and franking credits in the statement, just show ‘Gross Distribution Amount’. How can one calculate franking credits?

    • Chan & Naylor says:

      All statements should show Franked and Unfranked Dividends, and the amount of the franking credits is also shown.

      It’s also Not called a Distribution. A “distribution” is normally associated to receipts from a Unit Trust. Are you sure you have invested into a company and not a Trust? Perhaps you can call them to enquire about what it is. There is usually a contact number.

  5. gregorio lockard says:

    I think the admin of this website is really working hard for his
    site, for the reason that here every stuff is quality based information.

  6. Tom Gowing says:

    Hi Ed – great site !

    Say I own 1300 shares in which 2016/2017 paid dividends totalling 1.87 per share fully franked – what would be the franking credit amount needed to be included in my assesable income ?

    Please help !

    a 1702

    b 1042

    c 3473

    d 1656

    • Chan & Naylor says:

      Hi Tom,

      C is the answer.

      Total franking dividend received on 1300 shares @1.87 will be $2,431, attached with a franking credit of $1,041.86. Therefore total assessable income will be $2,431 + $1,042, given total assessable income of $3,473, i.e. answer c. The franking credit can read as 30% tax on profit of $3,473 paid the listed company. Hope it helps. Should you need more assistance, contact us here and we’ll be more than happy to help.

  7. Rashed Moyeen says:

    Hi, I would like to know whether a company can pay any dividend in advance with the expectations that the company will make profits in the future.

    • Ed Chan says:

      A Company can only pay dividends from Retained Earnings which is another word for accumulated profits. In another way to look at this is that unless the company had made profits how will it have the money to pay a dividend unless it borrowed money to do this.

  8. Won says:

    Hi,
    A company would pay dividend out of retained earnings, so dividends would always be franked dividends right? When will a company pay unfranked dividends? I mean, can company pay dividends from current year profit before corporate income tax return is lodged?
    And if an AU resident company is paying dividend to its AU resident subsidiary who is in the same tax consolidated group, whether it is franked or unfranked it would not attract tax right?
    Thanks in advance!

    • Ed Chan says:

      Hi Won,

      Dividends are paid out of retained earnings and most of the time it’s franked. A company would pay unfranked dividends when it has received tax-free revenue such as exemption from capital gains tax or depreciation creates tax-free cash flow. A company can pay dividends from current year profits as long as it does not go into negative retainer earnings. Namely, pay more than it has in retained earnings.
      And yes, if an AUS company pays a dividend that is franked to another AUS subsidiary company, there is no tax, and the franking credits move to and reside in the subsidiary company.

  9. Rocasea says:

    Looks really great! Thanks for the post.

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