Which of the following describes the treatment of unfranked dividends for tax purposes?

Unfranked dividends are subject to full tax rates because they do not carry a franking credit, which is a mechanism that allows shareholders to receive a tax credit for tax that has already been paid at the corporate level. When a company distributes unfranked dividends, it implies that the dividends have not been taxed prior to reaching the shareholder. As a result, shareholders must pay tax on the full amount of these dividends at their marginal tax rate.

This treatment contrasts sharply with franked dividends, which allow shareholders to offset their tax liability using franking credits. Therefore, unfranked dividends are essentially treated as ordinary income, and the absence of tax credits means that they incur the full applicable tax rates, making it crucial for investors to understand this distinction for tax planning purposes.