Dividends are payments made by a company to its shareholders, usually in the form of cash or additional shares. In the Australian taxation system, dividends paid to shareholders by Australian resident companies are taxed under a system known as ‘imputation. This means that the tax paid by the company is allocated to shareholders as franking credits attached to the dividends they receive
A franked dividend is a dividend that carries tax credits, which represents the tax the company has already paid on its income. These Tax Credits will cover or partly cover the tax payable on the dividends.
Unfranked dividends, on the other hand, do not have franking credits attached to them. This means that if you receive an unfranked dividend, it will add onto your taxable income and you will have to pay tax on it.
For example, let’s say John receives a fully franked dividend of $700 with a franking credit of $300. On his tax return, John must include both the $700 dividend and the $300 franking credit as assessable income. Tax is payable at John’s applicable tax rate on these amounts. However, John is also entitled to a franking tax offset equal to the amount of the franking credit included in his income. This offset can be used to reduce his tax liability from all forms of income (not just dividends), and from his taxable net capital gain.
So there's your explanation of how dividends, franking credits, and unfranked credits work in the taxation system and their effect on your taxable income and tax payable!
And when you're ready to get your Income Tax return done then there's no other place than Gotax to make it all happen.