profits and if it then paid a dividend, that dividend was taxed again as income for the shareholder, i.e. a part owner of the company, a form of double taxation. In 1997 the eligibility rules (below) were introduced by the Howard–Costello Liberal Government, with a $2,000 small shareholder exemption. In 1999 that exemption was raised to the present $5,000. In 2000, franking credits became fully refundable, not just reducing tax liability to zero. In 2002, preferential dividend streaming was banned. In 2003, New Zealand companies could elect to join the system for Australian tax they paid. Operation A shareholder's taxable income is grossed up to include the value of the company tax deemed to have been prepaid on the dividend. This value is also credited to the shareholder. For example, if a company makes a profit of $100 and pays company tax of $30 (at 2006 rates) to the tax office, it records the $30 in the franking account. The company now has $70 of retained profit to pay a dividend, either in the same year or later years. When it does so, it may attach a franking credit from its franking account, in proportion to the tax rate. If a $70 dividend is paid it could attach $30 of franking credits, and the franking account is debited by $30. An eligible shareholder receiving a franked dividend declares as income the cash received, plus the franking credit. The franking credit is then credited against the tax payable on their income. The effect is as if the tax office reversed the company tax by giving back the $30 to the shareholder and had them treat the original $100 of profit as income, in the shareholder's hands, like the company was merely a conduit. Thus company profits distributed to eligible shareholders are taxed in their entirety at the shareholder's rate. Profits retained by the company or distributed to ineligible shareholders remain taxed at the corporate rate. Dividends may still be paid by a company when it has no franking credits (perhaps because it has been making tax losses), this is called an unfranked dividend. It may pay a franked portion and an unfranked portion, known as partly franked. An unfranked dividend (or the unfranked portion) is ordinary income in the hands of the shareholder. Refund A franking credit on dividends received after 1 July 2000 is a refundable tax credit. It is