Dividend imputation is a tax rule under which the shareholders in a company effectively get the benefit of tax which the company has paid. Division 207 of the Income Tax Assessment Act 1997 contains the main provisions relevant to shareholders. Essentially the way it works is that the shareholder will include the dividend received in his or her assessable income but is then entitled to claim a tax offset equal to the franking credit on the dividend. For taxpayers on marginal tax rates below the 30% corporate tax rate, this can in fact lead to a refund from the ATO of the difference between the taxpayer's marginal rate and the tax paid by the company. An example will illustrate the different outcomes with different taxpayers. Jill has salary of $100,000 and receives a $7,000 dividend with $3,000 of franking credits. On that income (including medicare levy) Jill will pay tax of $33,900. However, her franking credit of $3,000 is applied to reduce her tax payable to $30,900. In contrast Bill has no income other than his $7,000 dividend and $3,000 franking credits. He would normally pay $600 tax on his earnings, however, applying the $3,000 franking credit leaves him with a nice refund from the ATO of $2,400. Happy days for Bill.