Unfranked Dividend
A dividend paid from profits on which no Australian company tax has been paid, so no franking credits are attached.
An unfranked dividend is a dividend paid from profits on which the company has not paid Australian company tax. As a result, no franking credits are attached to the dividend. This can occur when a company has generated profits overseas (taxed in another jurisdiction), has tax losses that offset its Australian tax liability, or has earned income that is exempt from Australian company tax.
For shareholders, unfranked dividends are simply included in assessable income at their full cash value and taxed at the shareholder's marginal rate — with no offsetting franking credit. This means the effective tax rate on unfranked dividends is always the shareholder's full marginal rate, compared to the reduced effective rate on franked dividends.
Companies that commonly pay unfranked or largely unfranked dividends include those with significant overseas operations (where profits are taxed in other countries rather than Australia), companies in their early growth phase that have carried forward tax losses, and real estate investment trusts (REITs) that distribute income through trusts rather than as company dividends. When evaluating unfranked dividends, compare the cash yield directly with other unfranked income sources like bank interest, as neither benefits from imputation.
How it works
An unfranked dividend is paid from profits on which the company hasn't paid Australian company tax, so no franking credit is attached to it at all. This happens when the underlying profit was earned overseas and taxed in another jurisdiction, when the company has carried-forward tax losses offsetting its Australian tax liability, or when the income is exempt from Australian company tax in the first place. The dividend statement for such a holding will typically show 0% franked.
For tax purposes, you simply include the full cash amount of an unfranked dividend in your assessable income at face value and pay tax on it at your own marginal rate — there is no offsetting credit to reduce that bill. This makes unfranked dividends materially less tax-efficient, dollar for dollar, than a franked dividend of the same size, because the entire cash amount is taxed without any relief for tax already paid elsewhere.
Sources of unfranked dividends include companies with substantial overseas operations, early-stage or growth companies still carrying forward prior tax losses, and real estate investment trusts that distribute income through a trust structure rather than as a direct company dividend. When comparing an unfranked dividend's yield against other investments, the fairest comparison is against other unfranked income like bank interest, since neither benefits from imputation and both are taxed in full at your marginal rate.
Example: tax treatment of an unfranked dividend
An investor receives an $850 unfranked dividend from a company with significant overseas earnings.
The full $850 is added to the investor's assessable income for the year, taxed at their marginal rate with no offsetting franking credit — unlike a franked dividend of the same cash amount, which would come with an attached credit reducing the investor's overall tax.
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Franking Credits (Imputation Credits)
Tax credits attached to dividends representing company tax already paid on the profits, preventing double taxation.
Fully Franked Dividend
A dividend where the company has paid the full company tax rate on the underlying profits, with maximum franking credits attached.
Partially Franked Dividend
A dividend where only part of the underlying profits have been taxed in Australia, so only partial franking credits are attached.
Income Tax
Tax levied by the federal government on your taxable income, calculated using progressive tax brackets.
Trust Distribution
Income distributed from a trust to its beneficiaries, who include it in their own tax returns at their individual tax rates.