If you have invested in businesses, or even are a shareholder in your own small business, you may well have received a dividend as a result of that investment, or in the case of your own business be looking to pay yourself a dividend at some point in the future. These dividends could be paid to you in one of three ways:
- Fully franked – whereby the company has paid tax in full at the company rate before issuing the dividend to investors
- Partly franked – whereby the company has paid tax at the company rate against in part before issuing the dividend
- Unfranked – whereby no tax has been paid before the dividend has been paid to the investors
Until 1987 the tax paid by the company prior to dividends being paid out were irrelevant as the investor was taxed against their own marginal rate on the amount they received. In effect, the government was receiving tax twice against the amount of the dividend. Once when the company made a profit and again when the dividend was paid over. Each dollar of the dividend was basically taxed twice.
Since 1987, the new imputation system allowed for the tax already paid by the company at the company rate to become a credit against the tax payable by the receiver of a dividend so that the individual taxpayer only paid the difference between the company rate and their own marginal rate.
The tax already paid is shown as a franking credit when receiving a dividend payment so that the taxpayer knows how much tax already paid will be deducted from their overall tax liability to determine how much more they will be liable for or even how much of a refund they will be entitled to.
Should you be thinking about investing your funds long term in order to receive future dividends, it would be a good idea to discuss this with your tax accountant so that they can advise you based upon your personal circumstances.