What is the difference between fully franked and unfranked dividends?
Fully franked vs unfranked dividends is a common topic for investors in Australia, especially those building an income-focused portfolio. If you invest in Australian shares, you will often see dividends described as “fully franked,” “partially franked,” or “unfranked.” Understanding the difference is important because it directly affects how much tax you pay on the income you receive from your investments.
A dividend is a payment made by a company to its shareholders, usually from profits. When Australian companies earn profits, they generally pay corporate tax on those profits before distributing them to investors. The franking system exists to prevent those profits from being taxed twice — once at the company level and again when shareholders receive the dividend.
A fully franked dividend means the company has already paid the full Australian corporate tax rate on the profit used to pay that dividend. Because the tax has already been paid, shareholders receive a “franking credit” along with the dividend. This credit represents the tax the company has already paid on your behalf. When you lodge your tax return, you include both the dividend and the franking credit as income, but you also use the credit to offset your personal tax bill.
For example, imagine a company earns $100 in profit and pays the 30% corporate tax rate, leaving $70 available to distribute to shareholders. If that $70 dividend is fully franked, investors also receive a $30 franking credit. When reporting income for tax purposes, the investor declares the full $100. However, the $30 credit can be used to reduce the investor’s personal tax liability.
This system can create a significant advantage for many Australian investors. If your personal tax rate is lower than the corporate tax rate, the franking credit may exceed the tax you owe on the dividend. In that case, the excess credit may be refunded to you. This is one reason fully franked dividend stocks are popular with retirees and income-focused investors.
An unfranked dividend is different because no tax credit is attached. This usually means the company has not paid Australian corporate tax on that portion of profits. There are several reasons this can happen. A company might have overseas earnings where tax was paid in another country, it may have used tax deductions to reduce its taxable income, or it may be distributing profits from sources that were not taxed in Australia.
Because unfranked dividends have no attached franking credit, investors simply report the dividend itself as income on their tax return. The dividend is then taxed at the investor’s marginal tax rate. In practical terms, this means unfranked dividends often result in a higher tax bill compared to fully franked dividends, depending on your personal tax bracket.
Partially franked dividends also exist. In this case, only part of the dividend carries a franking credit while the rest is unfranked. For example, a dividend might be 70% franked and 30% unfranked. Investors receive a franking credit on the franked portion and pay normal income tax on the unfranked portion.
For Australian investors searching for reliable income, fully franked dividends are often considered attractive because they increase the effective yield after tax. When evaluating dividend stocks, many investors look not only at the dividend yield but also at the franking level, since a fully franked dividend can significantly improve the overall return.
Understanding fully franked vs unfranked dividends helps investors make better decisions about income investing, portfolio construction, and tax planning. By knowing how franking credits work and how dividends are taxed, investors can better estimate the true after-tax income generated by their share portfolio.