Retained Profits, Dividends & Franking Credits: A Guide for Australian Business Owners Going Offshore

Introduction

Retained profits built up inside your Australian company often feel like accessible wealth, especially after years of reinvesting in the business. That assumption is challenged the moment you consider a change in tax residency, as those profits can become significantly harder & more expensive to access once you are a non-resident.

The value you can extract from your company’s franking credits depends almost entirely on the sequencing of your departure & distribution. This guide explains how dividends & Australian tax work for non-resident shareholders, clarifying the key decisions you need to make before your residency changes.

Interactive Tool: See If You Should Distribute Profits & Franking Credits Before Moving Offshore

Why Retained Profits Become a Problem When You Move Offshore

The moment a residency change is considered, the mechanism for distributing those profits tax-efficiently is altered & for business owners who have been building rather than distributing, the shift can be expensive if it catches them unprepared. 

The Australian dividend imputation system uses franking credits to prevent company profits being taxed twice, but this mechanism stops working for non-resident shareholders. A non-resident cannot claim a tax offset or refund for any franking credit attached to a dividend. The economic benefit of years of corporate tax payments, stored as franking credits, is largely lost the moment a shareholder ceases to be an Australian resident. This is why distribution decisions must be made before departure, not after. 

How Dividends & the Distribution Mechanism Work

Moving Profits From an Australian Company to Shareholders

For Australian business owners, the basics of moving profits from a company to its shareholders seem straightforward, but the timing & structure of these distributions have significant tax consequences. A dividend is a distribution of company profits to shareholders & can only be paid from those profits, not from the company’s capital.

The way a distribution is timed and structured determines three critical outcomes for your business and personal tax position:

1. Tax at the company level: the company’s tax history directly influences how a dividend can be treated;
2. The shareholder’s tax position: your personal tax circumstances at the time you receive the dividend dictate the final tax cost; and 
3. Whether franking credits can be attached: this depends on the company having paid Australian tax & having a sufficient balance in its franking account.

Division 7A & the Risk of Informal Company Loans

Australian business owners who have informally accessed company funds through director loans or other arrangements face a major risk when they change residency. Under Division 7A of the Income Tax Assessment Act 1936 (Cth), these payments, loans, or forgiven debts are treated as unfranked dividends unless they are structured as complying loans.

Failing to resolve these loans before departure means they can be deemed dividends, attracting withholding tax for a new non-resident shareholder with no franking credit offset available.

What Franking Credits Are & What They Are Actually Worth

How the Imputation System Works for Australian Resident Shareholders

Australia’s dividend imputation system is a critical mechanism that prevents company profits from being taxed twice — once at the company level, and again in the hands of the shareholder. When an Australian company pays corporate tax on its profits, it generates franking credits, which are recorded in its franking account.

A resident shareholder who receives a fully franked dividend must declare both the cash dividend & the attached franking credit as assessable income. However, they are entitled to a tax offset equal to the value of the franking credit, with any excess credits being refundable.

For business owners who have spent years reinvesting profits rather than distributing them, the company’s franking account represents real economic value. This value can be unlocked through a carefully timed dividend distribution before a change in tax residency makes the system work very differently.

What the Franking Account Balance Determines

An Australian company cannot attach more franking credits to a dividend than it has available in its franking account balance. This balance acts as a ceiling on the company’s ability to pay franked dividends, making it a crucial metric for any distribution strategy.

Australian business owners who have traded profitably for several years may have a substantial franking credit balance. It represents years of accumulated tax payments that can be passed on to shareholders, but only while they remain Australian residents.

What Changes When the Shareholder Becomes a Non-Resident

How Franking Credits Work Differently for Non-Resident Shareholders

For Australian business owners, the value of franking credits changes completely once they become a non-resident. While resident shareholders can use franking credits to offset their tax liability and receive a refund for any excess, these benefits do not extend to a non-resident shareholder. Instead, the primary benefit of a franked dividend for a non-resident is an exemption from Australian Dividend Withholding Tax (DWT).

This DWT exemption replaces the tax offset, a significantly less valuable outcome for the shareholder. The non-resident receives the cash dividend without additional Australian tax, but the company tax already paid is the final & only tax on that income. There is no refund & no top-up mechanism. 

Under section 128B of the Income Tax Assessment Act 1936 (Cth), DWT applies to the unfranked portion of any dividend paid to a non-resident. This means any part of a dividend that is not covered by a franking credit will be subject to withholding tax.

Unfranked Dividends & Withholding Tax for Non-Resident Shareholders

When an Australian company pays an unfranked dividend to a non-resident shareholder, that dividend income is subject to a final withholding tax. Under Australia’s domestic law, the DWT rate is 30% on the full unfranked amount, with no deductions or offsets available to the departed Australian business owner.

This rate is often reduced where Australia has a Double Tax Agreement (DTA) with the shareholder’s new country of residence. Key points for Australian business owners include:

• Reduced DTA rates: Most of Australia’s tax treaties cap the DWT rate, typically at 15%.
• Partially franked dividends: If a dividend is only partially franked, DWT applies only to the unfranked portion of the dividend paid. The franked part remains exempt from DWT.
• Conduit Foreign Income: Where an unfranked dividend represents income earned offshore & passed through the Australian company, it can be declared conduit foreign income & is exempt from DWT. 

The practical consequence for business owners is stark. Distributing retained profits as unfranked dividends after departure results in a direct cost of 30% (or 15% under a DTA) from the dividend paid, with no mechanism to offset this tax in Australia.

Where Australian Business Owners Get This Wrong

Departing Without a Distribution Strategy

The most common and expensive mistake Australian business owners make is departing the country with significant retained profits but failing to implement a clear distribution strategy for moving offshore. The issue is not the size of the retained profits, it is the failure to model the after-tax cost of distributing post-departure versus pre-departure.

The difference is material: a fully franked dividend to a resident shareholder at a 45% marginal rate results in a 15% top-up payment. The same distribution as an unfranked dividend to a non-resident results in 30% DWT with no offset. 

Assuming Franking Credits Hold the Same Value After Departure

Another critical error is assuming that the value of franking credits remains the same after a change in tax residency. The credits do not disappear; they remain in the company’s franking account, but their value to a non-resident shareholder is zero in terms of tax offsets. The real value accumulated in the franking account over years of paying corporate tax is effectively lost upon departure.

Division 7A Exposure on Departure

A change in residency can crystallise significant tax liabilities for business owners with unresolved director loans. Division 7A deems these arrangements as unfranked dividends upon departure, immediately exposing the shareholder to DWT. This is far cheaper & simpler to resolve before changing residency than after.

How to Handle Retained Profits & Distributions Before Departure

Assessing the Franking Account & Modelling the Distribution Cost

The first step for any Australian business owner considering a residency change is to understand the company’s current franking account balance. This balance dictates the after-tax cost of distributing profits now versus after departure. For many business owners, a pre-departure distribution will be materially cheaper, but the modelling must be done before the decision is made.

This process involves three key steps:

1. Confirming the franking account balance with the company’s accountant to know exactly what franking credits are available.
2. Modelling the tax cost of a fully franked dividend at the shareholder’s current marginal tax rate while they are still an Australian resident.
3. Comparing that cost with the post-departure alternative, which is typically a 15% or 30% DWT on an unfranked dividend with no offset.

Sequencing Departure & Distribution

The sequencing of departure & distribution is the single most important structural decision for Australian business owners with significant retained profits. A distribution made while still an Australian tax resident uses the franking credit offset mechanism in full. After departure, that opportunity is gone.

Whether a pre-departure dividend makes sense depends on three factors:

1. the franking account balance;
2. the shareholder’s expected marginal rate at the time of distribution; and
3. the planned departure date.

The timing of the dividend payment relative to the date of departure & the income year in which it falls all affect the final tax outcome.

Resolving Division 7A Before Departure

Any outstanding Division 7A exposure from director loans, unpaid present entitlements, or other informal arrangements should be identified & resolved before departure. These arrangements, if not properly managed, can crystallise into unfranked deemed dividends when residency changes.

Restructuring existing loans into complying Division 7A loans or repaying outstanding balances avoids this outcome. This is a critical pre-departure clean-up task, as fixing these issues is far cheaper before departure than after a residency change triggers the deeming provisions.

Conclusion

The value of retained profits & accumulated franking credits shifts dramatically once an Australian business owner becomes a non-resident. This makes the sequencing of distributions & departure a critical structural decision, as the window to act is before you leave. The business owners who get this right are not the ones who distribute everything before they leave;  they are the ones who model the cost early, sequence the decision correctly, & resolve the loose ends before departure locks in the outcome. 

If you are considering a change in residency & hold significant retained profits, discuss your distribution strategy with WealthSafe’s advisory team. WealthSafe specialises in helping Australian business owners design and implement structures that are compliant, tax-efficient, & aligned with your long-term goals.

Frequently Asked Questions