What and how franked
dividends work in Australia

Unsure how franked dividends work? Or what they actually are? Find out everything you need to know about franked dividends and how they can benefit you at tax time.

Investing in the share market could be your first step towards wealth building for the long term.However, some people believe that becoming an investor is too complicated or risky — particularly when unfamiliar terms such as “fully franked” and “unfranked dividends” are thrown around by experienced traders.

The good news is that investment terminology is not as complicated as it first appears — and with some basic knowledge, you can take to the market and start building your portfolio.

If you are ready to explore the Australian markets and what they can offer you as an investor, it is important to learn about the common parlance of shares, dividends and the stock market at large. This helpful guide will walk you through the intricacies of franked dividends so you can be more confident about your earnings when tax time comes around.

What is a franked dividend?

Understanding what a franked dividend is — starts by breaking down how dividends are paid out to shareholders.

Dividends are payments to investors drawn from a company’s profits — it does not matter whether they are paid out twice annually, which is standard for most dividend shares, or several times throughout the year.  Because these dividends come from the profits of the company in which you are investing, it is expected that the amount shareholders receive has already been subject to tax at the corporate level.

This arrangement in Australia means that investors receiving dividends may get a tax credit to avoid double taxation. This credit is referred to as a franking credit and is directly tied to the amount of tax the company has already paid on the dividend.

When tax time arrives, the shareholder will submit the dividend income they received plus the franking credit as income. However, they will only have to pay tax on the dividend portion.

Depending on the type of share, dividends can be fully franked or only partially franked. This will all be explored in further detail in the following sections.

How do franked dividends work?

When you receive your franked dividend, it will come with a dividend statement that explains in detail the following:

1. The exact amount you are receiving
2. The franked credit
3. How this is determined against the tax rate.

That means you will not need to do any complicated calculations yourself, but we will break down the formula below for your reference.

For example, imagine that a shareholder receives a fully franked dividend paying $700 from a company in which they invest. This company has a corporate tax rate of 30%, so the franking credit is calculated by the following formula:

(Dividend amount / (1 − Company tax rate)) − Dividend amount = Franking credit

OR

($700 / (1 − 0.30)) − $700 = $1,000

This means the fully franked dividend of $700 has a franking credit of $300. If this dividend was not fully franked, then the investor would have to pay tax on the total amount ($1,000).

The investor’s tax bracket is also an important consideration in determining the final balance. In this case, if the investor’s personal tax bracket is 30% and the dividend was fully franked, then the investor would declare the full $1,000 in their taxable income with the $300 franking credit as a tax offset

However, if the investor’s tax bracket is lower or higher than 30%, the final tax balance will be different. If, for example, the investor’s individual tax rate is 15%, they would have been required to pay $150 in tax on the unfranked dividend.

As the company has paid $300 in tax, when the individual is only required to pay $150, the ATO will issue a tax credit of the difference. If the investor’s tax rate is higher than 30%, they may be required to pay additional tax.

How do franked dividends work on eToro?

How dividends work on eToro may vary from other trading platforms. If you have invested in a company on eToro that has paid out a dividend, franked or unfranked, this will appear in your portfolio’s account statement. This account statement is always available and can be downloaded for tax purposes so you can determine the relevant numbers.

The process can be complex when factoring in different countries and their taxation rates. While US stocks and ETFs generally have a tax rate of 30%, the same as Australia, other countries may have higher or lower tax rates and their own method of calculating these numbers.

TIP:  At tax time, it can be helpful to consult a taxation specialist with knowledge of ASX stocks, international stocks and other assets such as crypto.

What are the different types of franked dividends?

Aside from unfranked dividends — which do not provide shareholders with any franking credit — there are two types of franked dividends: fully franked dividends and partially franked dividends.

As you can see in the formula above, a fully franked dividend means the company pays tax on the entire dividend, making the franking credit much higher than if it were only partially franked.

The reasons why a company may only offer a partially franked dividend are often more complicated and relative to the company’s finances in previous years. For example, if the company incurred losses and was able to claim tax credits because of that, then they may not have had to pay the entire tax rate on their profits for that particular financial year.

However, because they did not pay enough tax to give shareholders a full tax credit on their dividend (i.e., franking credit), only a portion of that dividend can be franked. So the investor will have to make up the difference and is responsible for paying any additional tax.

Companies are under no obligation to provide fully franked dividends, and just because one year they offer fully franked does not mean it will be the same year-on-year.

Are there any benefits of franked dividends?

The most obvious benefit of franked dividends is that the shareholders get a tax break on their dividend payouts. Since the company tax rate is 30%, if the investor’s personal tax rate is also 30%, their dividends are tax-free thanks to the franking credit.

Franked dividends are also generally good for the stock market. After all, income that is hit with “double tax” makes it less attractive for Australians to invest their money in publicly traded companies that offer dividends.

Therefore, franked dividends not only reduce the tax burden on shareholders, but also help stabilise the market and make it more competitive.

What are the benefits of franked dividends for SMSFs?

While many different forms of investment can be chosen by the trustees of a self-managed super fund (SMSF), many invest in dividend-paying stocks to take advantage of the tax benefits franking dividends offer. If an SMSF is in the accumulation phase and invests in Australian stocks with fully franked dividends, the fund can utilise the franking credits it receives to reduce the total tax payable. 

As most fully franked dividends are taxed at a rate of 30%, the credits received may reduce the tax liabilities of the SMSF, which are taxed at 15%. The fully franked dividends help to offset the tax payable on dividends. They may also reduce the total tax paid on other forms of income, such as rental income or interest if the value of the franking credits received is high enough.

If the total value of the franking credits accumulated by an SMSF is higher than the total tax payable by the fund, the excess credits will typically be converted into a cash refund by the Australian Tax Office. This can be reinvested into the fund.

TIP: Share market terminology can sometimes seem complicated — and it may be a reason why someone decides not to start investing in shares. However, it becomes much easier to understand when you dig into the details and may even help your future decision-making on your investment journey.

With eToro’s market news and analysis, Aussie guides to trading and the one-of-a-kind CopyTrader™ feature, getting involved in the stock market has never been easier.

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