The dividend imputation system, or franking as it is commonly known, has had more than its fair share of media attention of recent times, so, what is all the hubbub about?

As background, the imputation system was introduced to the Australian Taxation system in an attempt to ease the double taxation of dividend income. As a general proposition companies pay tax at a flat rate of 30% of their profit, these profits can then be distributed to shareholders in the form of dividends. When the recipient lodges their tax return they declare as income both the physical dividend plus the tax paid by the company (known as grossing up), once the tax on the grossed up amount is calculated they are allowed a rebate equal to the tax already paid by the company.

For example, a company makes a profit of $1,000, it pays $300 tax and pays a dividend of $700;

1. Individual on top marginal rate declares income of $1,000. Tax payable @ 45% is $450 less a rebate of $300 means $150 tax is still payable.  
Leaving $550 after tax.

2.     A superannuation fund at a flat rate of 15% declares income of $1,000 tax payable is $150 less the rebate of $300 means a refund of $150.
Therefore after tax income is $850.

3.     A pension account at 0% tax declares $1,000 income tax payable is $0 means a refund of $300. After tax income is $1,000.

In effect all recipients pay their own rate of tax on the profit of the company, however  misunderstanding the system the imputation rebate looks like free money. Abolishing franking will mean everyone pays foregoes first 30% tax on every dollar earned by the company.