An accountant links company tax and dividends through the dividend imputation system, which is built so that company profit is not taxed twice. The company pays tax on its profit first, at 25% for most small companies or 30% for larger ones.
When it then pays a dividend to you as a shareholder out of that after-tax profit, it can attach franking credits representing the tax already paid. You declare the dividend and the franking credit on your own return, and claim the credit as an offset against your personal tax. Your accountant coordinates both sides, the company return, the franking account, and your individual return, so the same profit is taxed once overall, at your marginal rate.
Why company tax and dividends are connected
In Australia, a company and its shareholders are taxed under one linked system called dividend imputation. Without it, profit would be taxed twice: once as company tax, and again as income when paid out to you. Imputation prevents that by giving you credit for the tax the company has already paid. This is why your accountant never looks at the company’s tax and your dividends in isolation. The tax the company pays becomes a credit you use on your own return, so the two have to line up.
How your accountant links the two
Your accountant works across three connected pieces. First, they prepare the company tax return and calculate the tax on the company’s profit. Second, they maintain the company’s franking account, a running record of tax the company has paid, which creates franking credits, and of dividends it has franked, which use those credits up. Third, when a dividend is declared, they prepare a dividend distribution statement showing how much of it is franked and how many credits are attached, then report that dividend and its credits on your personal return. Because the franking credit on your return comes straight from the tax the company paid, the figures on both returns must reconcile.
A worked example
Say your company makes $100,000 profit and is a base rate entity taxed at 25%. It pays $25,000 in company tax, leaving $75,000. It then pays you a fully franked dividend of $75,000, with $25,000 of franking credits attached.
On your own return, you declare the grossed-up amount, the $75,000 cash plus the $25,000 credit, so $100,000 of income. You are taxed on that $100,000 at your marginal rate, then you subtract the $25,000 the company has already paid on your behalf.
The final result depends on your rate. If your marginal rate is 30%, your tax is about $30,000, less the $25,000 credit, so you top up roughly $5,000. If you are on the top rate of 47%, you top up more. If your rate is below 25%, or you are a low earner or a super fund in pension phase, the leftover credits can even be refunded to you. Either way, the profit is taxed once in total, at your rate, rather than twice.
The franking account, and why it limits dividends
A company can only frank a dividend to the extent it has actually paid tax. That is what the franking account tracks. If the company has $25,000 of franking credits available, it can attach up to $25,000 to dividends; it cannot hand out credits it never earned.
Paying an unfranked or partly franked dividend is allowed, but then you receive less or no credit and pay full tax on that portion. Your accountant watches the franking account balance so dividends are franked correctly, and so the company does not over-frank, which carries penalties. This is a big part of why the timing and size of dividends is a decision to plan, not an afterthought.
What the accountant needs to get it right
To keep the two sides aligned, your accountant needs a few things from the company: accurate financial records for the year, a record of any money taken out by directors or shareholders, and a resolution or minute for each dividend declared.
Declaring a dividend is a formal act, so it should be documented with a directors’ resolution and a distribution statement, not just a transfer out of the bank account. If those records are missing, the accountant cannot frank the dividend cleanly or prove it to the ATO, which is where most problems begin.
Salary versus dividends: the mix your accountant balances
If you both own and work in your company, you can usually take money out as salary, as dividends, or a mix of both. Each is taxed differently: salary is a deduction for the company and is taxed to you as wages, with super obligations attached, while dividends come from after-tax profit and carry franking credits.
There is rarely a single right answer, and the best mix depends on your marginal rate, the company’s rate, cash flow, and super. This is exactly the kind of planning an accountant does through the year, and our business advisers can model what leaves you better off overall rather than guessing at it.
Division 7A: the trap of just taking the money
The most common mistake directors make is simply drawing money out of the company without declaring it properly as salary or a dividend. Under a rule called Division 7A, money a company lends or pays to a shareholder or their associate can be treated as an unfranked dividend and taxed in your hands, often without any franking credit to soften it. That is the worst of both worlds. Your accountant manages this by documenting loans correctly, putting complying loan agreements in place where needed, and declaring dividends properly, so that what you take out is taxed the way you intended. Our note on what Pty Ltd directors get wrong covers this in more detail.
