How Are Franked Dividends Calculated? - Understanding (2024)

To properly understand fully franked dividend calculation, it is best to start with the basics surrounding what dividends are and how they can contribute towards your taxable income. To help you better understand franking credits and franked dividends, we recommend taking a look at our Guide to Franked Dividends. To recap, we’ve outlined the five main takeaways from this guide below.

1. When you invest in shares, you essentially own a piece of a company.
2. The size of that piece is determined by comparing how many shares the company has issued to investors and how many of those shares you own.
3. Whether privately held or publicly listed, the most common method companies use to distribute profits to their shareholders is through a “dividend”.
4. As a shareholder, you are entitled to a portion of the company’s profit in the form of this dividend.
5. While dividends count towards your yearly income, you may be exempt from paying tax on them if they are issued alongside franking credits. This is called dividend imputation.

Dividend imputation introduced the concept of franking credits in 1987 as a way to avoid the double taxation of company dividends. Dividends may be fully or partially taxed at the corporate rate of 30% before being passed on to shareholders. There are three types of dividends you may receive depending on how much tax has been paid on the company profits before they are distributed to shareholders as dividends. The three types of dividends are:

• Fully franked dividends – When the corporate tax rate of 30% has been applied to 100% of the dividend.
• Partially franked dividends – When the 30% corporate tax rate has been applied to a portion of the dividend.
• Unfranked dividends – When no tax has been deducted from the dividend.

If any tax has been paid on the dividends you have received, you will either be able to offset your tax or receive a tax refund. In most cases, the Australian Tax Office (ATO) will provide you with a tax refund if your income tax rate is lower than the 30% corporation tax rate. This is where partially and fully franked dividend calculation comes into play.

To work out what portion of your dividends are franked, you must calculate the franking percentage. This is calculated by dividing the franking credit amount distributed by the maximum franking credit amount the company is allowed to issue with each dividend. This calculation is commonly represented by the following formula:

(franking credit amount distributed ÷ maximum franking credit amount) x 100%

Example:

On the 30th of June 2020, ABC Ltd distributes $100,000 in dividends to its shareholders. Alongside this $100,000, ABC Ltd also allocates franking credits of $10,000. However, the maximum franking credit they are allowed to issue is $20,000.

To calculate the franking percentage for these dividends, we’ll use the formula listed above.

($10,000 ÷ $20,000) × 100% = 50%.

Therefore, the franking percentage for the dividends distributed by ABC Ltd is 50%

To calculate your franking credit amount, you’ll need to use the following formula:

((dividend amount ÷ (1 – company tax rate)) – dividend amount) x franking percentage.

Let’s use ABC Ltd as an example again and say you are paid a franked dividend of $100. As an Australian-based company, ABC Ltd’s company tax rate would be 30%. Using the above formula, we will calculate the franking credit amount as follows:

(($100 / (1 – 0.30)) – $100) x 0.5 = $21.43

This makes the franking credit amount attached to each dividend $21.43, and the total dividend amount received is $121.43.

If the dividend received from ABC Ltd was fully franked, you would do the following calculation:

(($100 / (1 – 0.30)) – $100) x 1 = $42.86

This fully franked dividend calculation would make the franking credit amount $42.86 for each dividend, making the total dividend amount received $142.86.

Dividends can be a great way to generate a regular income from your investments. However, even if your dividends are fully franked, you may still have to pay tax on them like you would any other form of income. Your dividend tax obligations depend on your marginal tax rate.

As a shareholder, when you fill out your annual tax return, you’ll need to include the dividend received plus the franking credit. You’ll then receive a tax credit for the value of the franking credit.

If your marginal tax rate is over 30%, this credit can be used to offset the amount of income tax you are required to pay. If your marginal tax rate is under 30%, this is when you may be entitled to a tax refund from the ATO.

Ultimately, it is important to speak to your accountant or financial adviser to understand the tax implications of your dividends.