How Franked Dividends Work in Australia

If your company is profitable, paying a dividend can be a simple way to return value to owners. In Australia, those dividends are often “franked” - and if you’re a small business owner, understanding what that means helps you make smarter decisions, stay compliant, and manage shareholder expectations.

In this guide, we’ll unpack franked dividends in plain English, explain how franking credits work, outline when you can declare dividends, and walk you through the practical steps to declare a franked dividend properly. We’ll also flag the key legal documents that help you keep everything running smoothly.

What Is A Franked Dividend (In Plain English)?

A franked dividend is a distribution your company pays to shareholders where some or all of the company tax already paid is “attached” to that dividend as a franking credit. In other words, the company has paid income tax on profits, and the Australian imputation system lets shareholders get credit for that tax when they include the dividend in their own tax returns.

Put simply: a franked dividend tells the shareholder, “we’ve already paid some tax on this profit at the company level,” which reduces the shareholder’s personal tax (subject to their own circumstances).

Key terms you’ll see:

• Franked dividend meaning: A dividend with franking credits attached.
• Unfranked dividend: A dividend paid without franking credits (for example, if there’s no franking account balance available).
• Franked amount meaning: The portion of the dividend to which franking credits are attached (can be fully franked, partly franked, or unfranked).

If you’re still getting familiar with dividends more generally (what they are, how they’re declared and paid), it’s worth reading a broader overview on understanding dividends first.

How Do Franking Credits Work For Your Company?

Franking credits reflect the tax your company has already paid on its profits. They’re tracked in a notional “franking account.” Each tax payment increases your franking account; each franked dividend you pay reduces it.

Here’s the practical flow:

1. Your company earns profits and pays company tax.
2. Those tax payments create franking credits in your franking account.
3. When you declare a dividend, you decide the franking percentage (how much of the dividend is franked).
4. You attach franking credits to the dividend (up to the available balance and subject to maximum franking rules).
5. You issue a dividend statement showing the franked amount and franking credit.

The maximum franking credit you can attach depends on your company’s tax rate (often 25% for base rate entities, or 30% for others). Your accountant can help calculate the maximum allowable franking and ensure you don’t over-frank (which can lead to penalties or top-up tax obligations).

Why this matters to owners and boards:

• Franked dividends can be more tax-effective for shareholders, especially where their marginal tax rate is lower than the company rate.
• Franking credits are finite. You can’t attach more credits than you’ve generated through company tax paid - so planning matters.
• Cashflow, solvency, and legal tests still come first. You can only pay dividends (franked or otherwise) when it’s legally permitted and sensible for your business.

Curious about ways to distribute assets that aren’t cash? In some scenarios, companies consider an in specie distribution - different to a cash dividend but often part of the same board conversation about returning value to shareholders.

When Can Your Company Declare A Dividend?

In Australia, dividends are governed by the Corporations Act 2001 (Cth) and your company’s internal rules. At a high level, directors should only declare a dividend if doing so is consistent with the law, your company’s constitution, and the company’s ongoing solvency and creditor interests.

From a legal and governance perspective, directors should be satisfied that:

• Paying the dividend won’t materially prejudice creditors and the company can continue to pay its debts as and when they fall due.
• The dividend is permitted by your internal rules - check your Company Constitution.
• The dividend is fair and reasonable to shareholders as a whole.

It’s also wise to consider directors’ duties and governance expectations when making dividend decisions. Applying the business judgment rule (see section 180(2)) involves informing yourself properly, acting in good faith and for a proper purpose, and rationally believing the decision is in the company’s best interests.

A few practical points we see small companies navigate:

• Profit vs cash: You might be profitable but cash poor. Dividends require cash (unless you’re doing something like an in specie distribution), so check cashflow before committing.
• Interim vs final dividends: Boards can declare interim dividends during the year and final dividends at year-end. Your constitution often sets the mechanics for each.
• Share classes: Different classes can carry different dividend rights. Make sure your constitution and any Shareholders Agreement are aligned with how you want dividends to work across classes.

For a deeper overview of your legal obligations when paying distributions, see our guide on dividends paid to shareholders.

Step-By-Step: Declaring A Franked Dividend The Right Way

There’s a simple, repeatable process you can follow. The exact steps will vary based on your constitution and cap table, but this framework works for most small companies.

1) Confirm Authority And Rules

• Review your Company Constitution to confirm the board’s power to declare dividends, any limits on timing, and any class-specific rights.
• Check your Shareholders Agreement for dividend policy, thresholds, or consent mechanics (especially in investor-backed companies).

2) Assess Solvency, Cashflow And Prudence

• Look at current cash reserves, forecasts, and upcoming liabilities. The board should be comfortably satisfied the company remains solvent after paying the dividend.
• Document the considerations. Well-kept board minutes help demonstrate good process.

3) Decide The Dividend Amount And Franking Percentage

• Set the amount per share or total amount. Consider whether it will be a fully franked or partly franked dividend (based on franking account capacity).
• Ask your accountant to calculate the maximum franking credits available and the correct gross-up so you don’t over-frank.

4) Pass A Board Resolution

• Record a formal decision with details of the amount, franking percentage, record date and payment date. A clear Directors Resolution avoids confusion later.
• Note any class-specific entitlements or exclusions if you have multiple share classes.

5) Prepare And Send Dividend Statements

• Issue a dividend statement to each shareholder. This should state the amount of the dividend, the franked amount, the franking credit and franking percentage, and the relevant dates.
• Update statutory registers and records. If you’re issuing new certificates (e.g., after any share changes preceding the dividend), keep your share certificates and registers consistent.

6) Update Your Franking Account And Tax Records

• Reduce your franking account for credits attached to the dividend and keep source documentation handy.
• Work with your tax adviser to ensure reporting and installment obligations are met.

Tip: Create a short internal “dividend checklist” you follow each time. It keeps the process efficient, compliant, and ready for audit.

What Legal Documents Help You Manage Dividends Smoothly?

Having the right documents in place makes dividend decisions faster and reduces the risk of disputes later. These are the staples we see in well-run small companies:

• Company Constitution: Sets out how dividends are declared, class rights and procedural steps. If yours is outdated or unclear, consider updating your Company Constitution so it matches how you actually operate.
• Shareholders Agreement: Aligns owners on dividend policy (e.g., profit thresholds, reinvestment priorities, veto rights). A clear Shareholders Agreement prevents misunderstandings and protects minority shareholders and the company alike.
• Directors Resolution Template: Using a consistent Directors Resolution format ensures each declaration captures the essential details and governance considerations.
• Dividend Policy (optional): Not legally required, but many boards adopt a simple policy to guide when dividends are considered versus reinvestment - useful as your shareholder base grows.
• Cap Table And Share Registers: Keep these current so payouts and statements align with actual holdings. If you’re planning exits or changes, our guide to valuing shares in a private company is a helpful companion resource.

If your longer-term plan includes buying back shares or reorganising ownership, you’ll likely discuss distributions alongside other corporate actions. It’s common to consider dividends in the context of capital returns, buy-backs, or a future share sale vs asset sale, so ensuring your governance documents are robust will pay off.

Common Questions From Small Business Owners

What’s the difference between fully franked, partly franked and unfranked?

Fully franked means you’ve attached the maximum allowable franking credits to the entire dividend. Partly franked means some (but not all) of the dividend carries franking credits. Unfranked means no franking credits are attached (often because there’s no franking account balance or you choose to preserve credits for later).

Can a startup pay dividends?

Legally, yes - as long as it meets the requirements for declaring dividends (and it’s permitted by your constitution). Practically, many startups reinvest profits into growth rather than pay dividends early on. A clear Shareholders Agreement will often set expectations about reinvestment vs distributions in the early years.

Who decides the dividend?

Typically, the board of directors declares dividends (subject to the constitution and any shareholder rights). Documenting decisions via a Directors Resolution helps maintain a clean record of amounts, dates, franking percentage and solvency considerations.

Are dividends the same as director fees or wages?

No. Dividends are returns to shareholders from profits; they aren’t remuneration for work performed. If you’re a working founder, your remuneration is usually via salary (or director fees) under an agreement, and dividends are separate distributions as an owner. If you need context on board-level pay, here’s a primer on director fees.

Is there a “best” time to pay franked dividends?

There’s no one-size-fits-all. Timing usually aligns with cashflow and tax planning around year-end. Work with your accountant to confirm franking capacity and the most efficient schedule for your business and shareholders.

What about different share classes?

If you have A, B or preference shares, the rights to dividends may vary by class. Double-check your Company Constitution and cap table before declaring an amount to ensure you pay the correct entitlements.

Could a non-cash distribution be franked?

Some distributions of property (in specie) can have tax and franking implications, but the mechanics are more complex than cash. If you’re exploring a non-cash approach, get advice early and read our guide to an in specie distribution.

Key Takeaways

• Franked dividends let you pass on company tax already paid to shareholders as franking credits; they can be fully franked, partly franked or unfranked.
• You can only attach franking credits you actually have - plan distributions around your franking account balance and the maximum franking rules applicable to your company tax rate.
• Directors should declare dividends only when permitted by law and your constitution, and when the company remains comfortably solvent after payment.
• A clear process helps: check authority, assess cashflow and solvency, choose amount and franking percentage, pass a board resolution, issue statements, and update records.
• The right governance documents - a robust Company Constitution, a practical Shareholders Agreement, and consistent board resolutions - keep distributions compliant and dispute-free.
• Tax outcomes depend on shareholder circumstances, so coordinate with your accountant alongside legal steps when planning franked dividends.

If you’d like a consultation on structuring and documenting franked dividends for your company, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.