When you lodge your annual tax return you need to include both the dividend payment and franking credit as part of your assessable income. You’re liable to pay tax on the ‘grossed-up’ amount.
For example, if a company pays you a $4,000 fully franked dividend and advises you the dividend franking credit is $1,714, you’ll need to include $5,714 ($4,000 + $1,714) as part of your assessable income in your tax return. You’re taxed on the grossed-up amount ($5,714), and you can claim a $1,714 franking credit tax offset against the net tax payable (see case study below). The formula to calculate the franking credit is ‘cash dividend times 30/70’ ($4,000 x 30/70 = $1,714). On the other hand if the $4,000 dividend was franked to 50 per cent, the franking credit falls by 50 per cent to $857 ($4,000 x 30/70 x 50% = $857). In this case you’ll need to include $4,857 as part of your assessable income, and your franking credit tax offset is $857. But if the $4,000 dividend is unfranked you’re liable to pay tax on $4,000 and you’ll receive no franking credit.
