The Imputation (Franking) System in Australia

Updated for the 2024–25 Financial Year

Australia’s imputation system is designed to eliminate the double taxation of company profits — once at the corporate level and again at the shareholder level. This system allows Australian resident shareholders to receive franking credits that reflect the income tax already paid by the company on its profits.

How the Imputation System Works

When an Australian (or eligible New Zealand) corporate tax entity pays income tax on its profits, it can attach franking credits to the dividends it distributes to its shareholders. These credits represent a tax already paid and can be used by shareholders to offset their own income tax liability.

This means that a shareholder includes the grossed-up dividend (the dividend plus the franking credit) in their assessable income and receives a tax offset equal to the franking credit. This reduces or eliminates their personal income tax payable on the dividend.

Franking Accounts

All Australian corporate tax entities are required to maintain a franking account — a notional ledger used solely for tax purposes to track the movement of franking credits and franking debits.

Franking Credits Arise From:

  • Paying Australian income tax

  • Receiving a franked distribution from another entity

  • Certain events such as the receipt of a tax offset

Franking Debits Arise From:

  • Paying a franked dividend

  • Receiving a refund of income tax

  • Certain anti-avoidance adjustments

Entities taxed as base rate entities (aggregated turnover under $50 million and passive income under 80%) pay tax at the 25% corporate tax rate. All other companies are taxed at 30%.

If an entity has a franking deficit at the end of the financial year (i.e., debits exceed credits), it must pay Franking Deficit Tax (FDT). This is not a penalty but a recovery of excess franking credits claimed.

Franked Distributions

When a company pays a dividend and chooses to frank it (wholly or partially), it must issue a distribution statement to each shareholder. This document details:

  • The amount of the dividend

  • The extent to which it is franked

  • The franking credit amount

  • The applicable franking percentage

  • The entity's ABN and other compliance information

This process ensures transparency and supports shareholders in claiming the appropriate tax offset.

Receiving a Franked Dividend

Under the gross-up and credit approach:

  • The shareholder includes both the dividend and the attached franking credit in their assessable income.

  • The franking credit is then applied as a tax offset against their income tax liability.

  • If the shareholder’s marginal tax rate results in less tax than the credit, the excess is refundable (for individuals and some super funds).

  • If their tax liability exceeds the credit, they must pay the difference.

Corporate Shareholders

When companies receive franked dividends:

  • The franking credit is not refundable.

  • Instead, if franking credits exceed the company’s tax liability, the excess is converted into a carry-forward tax loss, which can be used to reduce taxable income in future years.

  • The company also receives a franking credit in its own franking account, which it can pass on to its shareholders via future distributions.

Trans-Tasman Imputation

Under the Trans-Tasman imputation system, certain New Zealand companies can elect to maintain an Australian franking account, allowing them to issue dividends franked with Australian credits. Similarly, Australian companies can make an election to participate in the New Zealand imputation system.

This arrangement supports cross-border investment between Australia and New Zealand by allowing investors to benefit from tax credits in both jurisdictions (subject to relevant eligibility and compliance rules).

Compliance and Integrity Measures

The imputation system is subject to strict ATO regulations to prevent manipulation, including:

  • The holding period rule (generally 45 days) for claiming franking credits

  • Anti-streaming rules to prevent selective allocation of franked dividends

  • Benchmark franking rules, requiring consistent franking percentages within a distribution period

  • Excessive franking penalties where distributions exceed available credits

How We Can Help

At Complete Tax & Financial Services, we advise companies and investors on:

  • Franking account management

  • Tax-effective dividend strategies

  • Compliance with the ATO's franking rules

  • Preparing and issuing compliant distribution statements

  • Trans-Tasman franking arrangements

📞 Get in touch with our team for tailored advice on managing franking credits, distributions, and shareholder tax efficiency.

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