When a large company generates profits it pays tax at 30% on the net taxable income (or 25% if it is a small company).

It may then pay out a dividend to its shareholders from its after-tax profits. 

In this case, the income paid out as a dividend to shareholders has already had tax paid on it. Such a dividend is called fully franked and comes with a tax credit to the shareholder representing the amount of tax already paid by the company. This credit is also called an imputation or franking credit. 

The income that is included as assessable income in the hands of the shareholder includes both the cash dividend received and the franking credit.

The shareholder pays tax on the total amount, at their marginal tax rate, but is then entitled to a tax credit, representing the tax already paid by the company, to determine net tax payable. This process for assessing dividends in Australia is known as the dividend imputation system and ensures that shareholders are not taxed twice, or double taxed, on the dividend received. That is, once by the company paying the tax on its profits and then again when the after-tax profits are distributed to shareholders as a dividend.

Sometimes a company may not pay any tax on profits from which dividends are paid. In this case, the dividend is said to be unfranked and the shareholder includes only the dividend received in their assessable income but not any franking credit. There may be several reasons why a company may not pay tax on the profits earned during a year including the offsetting of previous year’s tax losses against the current year’s profit.