That is right, the 7c dividend will be deducted from 36.5c payout to work out the final payout amount.
For example if an investor is entitled to the full amount of franking credit, which is 7/7*3 = 3c, he will receive:
7c as dividend
3c as franking credit
29.5c final payout
Add all the above he gets 39.5c.
