Dividends received from Australian companies are considered taxable income. The tax treatment depends on whether the dividends are fully franked, partially franked, or unfranked. Here’s a detailed guide:
Tax on Dividends in Australia
Table of Contents
1. Types of Dividends and Franking Credits
| Type of Dividend | Description |
|---|---|
| Fully Franked | Company has paid full corporate tax (30% or 25%, depending on turnover) on profits before distributing dividends. |
| Partially Franked | Company has paid partial corporate tax, leaving some of the dividend unfranked. |
| Unfranked | No corporate tax has been paid on the dividend before distribution. |
Franking credits represent the tax already paid by the company on your behalf.
2. Taxation of Dividends
| Dividend Type | Tax Treatment |
|---|---|
| Fully Franked Dividend | Add both the dividend and franking credit to your taxable income, then claim the franking credit as a tax offset. |
| Unfranked Dividend | Add the dividend amount to your taxable income; no franking credits apply. |
| Partially Franked Dividend | Add the franked portion (including its franking credit) and the unfranked portion to taxable income. Claim a tax offset for the franking credit. |
3. How to Calculate Tax on Dividends
Example 1: Fully Franked Dividend
- Dividend received: $700
- Franking credit: $300 (tax paid by the company).
- Taxable income: $700 + $300 = $1,000.
If your marginal tax rate is 32.5%, tax on $1,000 = $325.
Tax offset (franking credit) = $300.
Net tax payable: $325 – $300 = $25.
Example 2: Unfranked Dividend
- Dividend received: $700.
- No franking credit applies.
- Taxable income = $700.
If your marginal tax rate is 32.5%, tax on $700 = $227.50.
4. Tax-Free Threshold and Refundable Credits
- If your total taxable income is below the tax-free threshold ($18,200), you may receive a refund for unused franking credits.
- Franking credits are refundable for individuals and some entities if they exceed your tax liability.
5. Dividends for Non-Residents
| Dividend Type | Tax Treatment for Non-Residents |
|---|---|
| Fully Franked Dividend | No withholding tax; franking credits cannot be claimed. |
| Unfranked Dividend | Withholding tax of 30% (or lower under certain tax treaties) applies. |
6. Dividend Reinvestment Plans (DRPs)
- Dividends reinvested under DRPs are still taxable.
- The reinvested amount is added to your taxable income.
- Cost base for capital gains tax (CGT) is adjusted based on the reinvestment.
7. Record-Keeping Requirements
| Record Type | Details |
|---|---|
| Dividend Statements | Provided by the company; includes details of franking credits and payments. |
| Reinvestment Records | Necessary for CGT calculations if shares are sold in the future. |
8. Tax on Dividends in Australia FAQs
- What is a franking credit?
A franking credit is a tax credit for the corporate tax already paid by a company on its profits before distributing dividends. - Are dividends taxable if reinvested?
Yes, reinvested dividends are taxable in the same way as cash dividends. - Do non-residents pay tax on Australian dividends?
Non-residents pay withholding tax on unfranked dividends, but not on fully franked dividends. - Can I get a refund of unused franking credits?
Yes, if your franking credits exceed your tax liability, the excess may be refunded. - How are partially franked dividends taxed?
The franked portion is taxed like a fully franked dividend, while the unfranked portion is taxed like an unfranked dividend.
Understanding how dividends are taxed allows investors to make informed decisions and maximize their returns.