What it means
The term appears in two related settings. In Australia it describes dividends carrying imputation credits, and in older UK law franked investment income described dividends received by one company from another that had already borne corporation tax.
The common thread is relief from double taxation on the same pool of profit. Without it, profit taxed at the operating company would be taxed again at the holding company and a third time in the individual shareholder's hands.
In practice a company receiving franked income includes the grossed-up amount in its assessable income, calculates tax on that figure, then offsets the credit. Where the recipient's own rate matches the rate already paid, the net effect is nil.
Franked income also refreshes the recipient company's ability to pass credits on. Credits received are added to its franking account and can then be attached to the dividends it pays to its own shareholders.
The nuance to watch is that not all dividend income is franked. Distributions from foreign subsidiaries, from tax-exempt profits or from capital typically arrive unfranked, so a holding company's dividend income is usually a mixture of both kinds.
Timing can matter almost as much as the amount received. A dividend paid just before a year end brings its credit into that year's return, so groups often schedule intra-group distributions to land in the period where the credit is most useful.
In practice
Real-world examples.
Example
An investment company receives $210,000 of fully franked dividends across its portfolio during the year. It grosses these up to $300,000, records $90,000 of credits and passes them straight through to its own unit holders.
Example
A family holding company owns two trading businesses, one domestic and one overseas. The domestic arm sends up $140,000 fully franked with $60,000 of credits, while the overseas arm sends $90,000 unfranked, so the family's tax outcome differs sharply between the two streams.
Example
A charity that pays no tax receives $35,000 of franked dividends carrying $15,000 of credits. Because it has no tax liability to offset, the credits are refunded in cash, lifting the real value of the holding to $50,000.
Formula
Calculation
Franking credit = cash dividend x (company tax rate / (1 - company tax rate))
Franked income (grossed up) = cash dividend received + franking credit attached
A fictional holding company receives a fully franked cash dividend of $70,000 from a subsidiary taxed at 30%. The multiplier at that rate is 0.30 / 0.70, or three sevenths.
The credit is $70,000 x 3 / 7 = $30,000, so franked income is $70,000 + $30,000 = $100,000. That $100,000 is the pre-tax profit the subsidiary earned to fund the payment.
The holding company includes $100,000 in assessable income and calculates tax at 30%, giving $100,000 x 0.30 = $30,000. Offsetting the $30,000 credit leaves nothing to pay, and the credit is added to its franking account for use on its own dividends.
Had the recipient been taxed at 25% instead, tax on the same $100,000 would be $25,000, which is $5,000 less than the credit attached. That $5,000 excess is either refunded or carried forward, depending on the rules of the jurisdiction concerned.Case study
Seen in the real world.
Bramblewick Group is a fictional investment holding company created for this illustration. In one year it receives $420,000 of fully franked domestic dividends carrying $180,000 of credits, plus $150,000 of unfranked dividends from a foreign associate.
Its franked income grosses up to $420,000 + $180,000 = $600,000, and total assessable dividend income is $600,000 + $150,000 = $750,000. Tax at 30% is $750,000 x 0.30 = $225,000, and after offsetting the $180,000 of credits the company owes $45,000, every dollar of which is attributable to the unfranked foreign stream.
The finance team also notes that the $180,000 of credits received has topped up the franking account, which is enough to fully frank $420,000 of dividends paid onward to Bramblewick's own shareholders. The board asks for a review of whether the foreign holding should sit in a different structure.
Watch out
Common mistakes.
- Recording only the cash received and omitting the gross-up, which understates assessable income and distorts the effective tax rate.
- Assuming all dividends from group companies are franked, when foreign-sourced or capital distributions usually are not.
- Confusing franked income with tax-free income, when it is fully taxable and the tax has simply been paid already.
Questions
People also ask.
Why gross up at all?
Because the credit represents tax already paid on your behalf, so including it shows the full pre-tax profit that generated your dividend.
Does franked income increase my tax bill?
It increases assessable income, but the attached credit usually cancels most or all of the resulting tax and can produce a refund for low-rate recipients.
Is franked investment income the same thing?
It is the older UK term for dividends received from a company that had already paid corporation tax, so the underlying idea is the same even though the rules have since changed.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related