What is a dividend and do I pay tax on it in Australia?
A dividend is a distribution of a company's profits to its shareholders. In Australia, you generally pay tax on dividends, but the unique imputation system means a credit for tax already paid by the company reduces or eliminates your personal tax liability.
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How it works in practice
Understanding Dividends
A dividend represents a portion of a company's profit that is paid out to its shareholders. When you own shares in a company, you become a part-owner, and as such, you are entitled to a share of its earnings if the board of directors decides to distribute them. Dividends can be paid in cash or sometimes as additional shares (dividend reinvestment plans).
Tax on Dividends in Australia
In Australia, dividends are generally included in your assessable income and are therefore taxable. However, Australia operates a 'franked' or 'imputation' system. This means that if the company has already paid tax on its profits, it attaches a 'franking credit' (also known as an imputation credit) to the dividend. This credit is your share of the tax the company has already paid.
When you include the dividend and its franking credit in your income tax return, the franking credit reduces the amount of tax you need to pay on that dividend. If the franking credit is larger than the tax you owe on the dividend, you might even receive a tax refund.
Important exceptions
None identified.
What you should do now
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Keep accurate records of all dividends received and any attached franking credits throughout the financial year.
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Understand that fully franked dividends mean the company has paid tax at the Australian company tax rate (currently 30%).
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Include all dividend income, both franked and unfranked, in your annual Australian income tax return.
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If the franking credits exceed your tax liability, you may receive a tax refund or use the excess to offset other tax payable.
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Seek professional tax advice if your investment portfolio is complex or if you are unsure about how to declare your dividends.
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