The dividend imputation system prevents double tax being paid by an investor.
When a company earns profit, they will pay part or all of this profit out to their shareholders in the form of a dividend, usually after paying company tax of 30%. When they pay this dividend after tax has been paid, this is called a fully franked dividend.
With the introduction of the dividend imputation system in 1987, investors who receive “fully franked dividends” are only taxed the difference between 30% and their own marginal tax rate since the company has already paid the 30% tax.
So if your individual tax rate is 30% then you will not have to pay tax on the dividends, i.e. the dividend is tax free. If your marginal tax rate is above 30%, say 46.5%, then you will pay the difference, 16.5%. Since 2000, franking credits became fully refundable, for example let’s assume you didn’t earn any taxable income for a particular year, if you received a dividend of $700, then not only is the money tax free, you will also receive a refund of $300 from the ATO