According to recent data, 36% of the adult population in Australia owns stock market investments. This equates to almost 6.5 million investors, some of whom are individuals and others who are part of Self-Managed Super Funds (SMSFs). Millions more own stock in privately held enterprises, many of which are operated by their families. A cash dividend is the most popular mechanism for firms to repay profits to shareholders.
Importantly, whether you own shares in a private or publicly traded corporation, the regulations for taxing dividends you get as a shareholder are generally the same.
Dividends are paid from profits that have already been subjected to the Australian corporation tax rate of 30%. (for small companies, the tax rate is 26 percent for the 2021 year, reducing to 25 percent for the 2022 year onwards). Recognizing that shareholders should not be taxed twice on the same income, the corporation pays a rebate to shareholders for the tax paid on profits distributed as dividends.
These dividends are referred to as “franked.” A franking credit is connected to franked dividends, which represents the amount of tax the corporation has already paid. Imputation credits are another name for franking credits.
A dividend-paying shareholder is entitled to a tax credit for any taxes the corporation has paid. The ATO will reimburse the difference if the shareholder’s top tax rate is less than 30% (or 26% if the paying company is a small business).
Because superannuation funds pay 15% tax on their earnings during in the accumulation period, most super funds will receive franking credit refunds each year.
ABC Pty Ltd earns a profit of $5 per share. It must pay 30% tax on the earnings, or $1.50 per share, leaving $3.50 per share to be retained by the company or distributed as dividends to shareholders.
ABC Pty Ltd decides to keep half of the profits in the company and give the remaining $1.75 as a fully franked dividend to shareholders. Shareholders receive a 30% imputation credit, which is not physically received but must be reported as income on the shareholder’s tax return. This can subsequently be claimed as a tax refund if necessary.
As a result, ABC Pty Ltd pays the taxpayer $2500 in taxable income, consisting of $1,750 in dividend income and $750 in franking credit, as follows:
Investor 1 may be a pension-phase super fund that doesn’t have to pay any tax and uses the franking credit return to support the pension payments it is required to make. It could also be a person who has no other source of income than the dividends from these stocks.
Investor 2 might be an SMSF in accumulation mode, taking use of the extra franking credit refund to offset the 15% contributions tax.
Investor 3 is a “middle-income” individual who pays only a small amount of tax despite earning $1750.
Investor 4 is a higher-income earner who must pay some tax on the $1750 dividend but has significantly decreased his tax rate on this income thanks to the franking credits.
When it comes to franking credits, the general rule is that if the dividend is fully franked and your marginal tax rate is lower than the paying company’s corporate tax rate (either 30% for large companies or 26% for small companies), you may be eligible for a refund of some of the franking credits (or all of them back if your tax rate is 0 percent ). If your marginal tax rate is higher than the paying company’s corporate tax rate, you may be required to pay additional tax on your dividend.
If you wish to invest in direct shares, look for companies that pay substantial dividends and provide complete franking credits.
When a company pays a dividend, it must send a distribution statement to each recipient shareholder with information about the paying entity and details of the dividend (including the amount of the dividend and the amount of the franking credit), which can then be used to help you fill out the relevant sections of your tax return. Private firms have until four months after the end of the income year in which the dividend was paid to present you with a distribution statement, whereas public companies must supply you with one on or before the day the dividend is paid.
Furthermore, public firms supply the ATO with information on dividends received, which means that the appropriate sections of your tax return will be pre-filled if the paying company has submitted the information on a timely basis.
Shareholders may be given the option to reinvest their dividends in additional shares of the paying firm in various instances. If this occurs, the dividend amount becomes the cost base of the new shares for CGT purposes (less the franking credit). Importantly, if you reinvest a dividend in this way, your income tax liability is computed in the same way as if you had received a cash dividend. That implies you could have an income tax burden – but no cash to pay it because all of your money was re-invested. When deciding whether or not a dividend reinvestment plan is good for you, keep this in mind.
Companies will occasionally issue bonus shares to shareholders. Unless the shareholder is given the option of a cash dividend or a bonus issue in the form of a dividend reinvestment scheme, these are not normally assessable as dividends (as per above).
Instead, the bonus shares are assumed to have been acquired at the same time as the original shares to which they are related for CGT purposes. This means that the existing cost base is spread among both the old and extra shares, resulting in a cost base reduction for the original parcel of shares.
To understand how franked dividends and franking credits work, let’s start with some basics.
When you buy stock, you’re buying a small piece of a company’s ownership. This is true even if you purchase stock in a large corporation such as BHP, Woolworths, or one of the major banks.
As a shareholder, you receive a portion of the company’s profits in the form of a dividend. This is usually done on a per-share basis. A corporation might pay a $0.10 per share dividend, for example. That may not appear to be much. However, if you hold 10,000 shares, the dividend amounts to $1,000.
Dividends are especially appealing in Australia because they are tax-free. This is where franking credits come into play.
Franking credits recognise tax paid by a company.
Companies pay tax on their annual profit in the same way that individuals do.
One significant distinction is that businesses pay a 30 percent flat tax rate. Small businesses may be required to pay 27.5 percent. However, the tax rate on firms listed on the Australian Securities Exchange (ASX) is normally a flat 30%. (By the way, that’s a lot less than many Australian workers pay in taxes.)
Simply said, the business is profitable. These profits are subject to a 30% tax. The profits left over after taxes are then distributed to shareholders as a dividend.
Dividends are taxable income for shareholders. Dividends used to be included to a shareholder’s other income and taxed at their individual tax rate.
The government realized in 1987 that dividends were being taxed twice: once when the corporation paid tax on its profits, and then again when shareholders paid tax on their dividend income.
As a result, we now have a system of franked dividends and franking credits, which prevents payouts from being taxed twice.
How do I declare dividends on my tax return Australia?
Filling up your tax return
- Add up all of your unfranked dividend amounts, including any TFN amounts withheld, from your statements.
- Add up all of your franked dividends from your statements, as well as any other franked dividends you’ve received.
How much dividend is exempt from income tax?
- On or after April 1, 2020, the Finance Act of 2020 imposes a TDS on dividend distribution by enterprises and mutual funds.
- TDS is deducted at a rate of 10% on dividend income in excess of Rs 5,000 from a corporation or mutual fund. However, as part of COVID-19 relief, the government cut the TDS rate for distribution from 14 May 2020 to 31 March 2021 to 7.5 percent.
- When submitting an ITR, the tax deducted will be applied as a credit against the taxpayer’s overall tax liability.
- TDS is required to be deducted at a rate of 20% for non-residents, subject to the terms of any DTAA (double taxation avoidance agreement). Non-residents must submit documentation verification such as Form 10F, declaration of beneficial ownership, certificate of tax residency, and other documents to receive the benefit of a lower deduction due to a beneficial treaty rate with their country of residence. In the absence of certain documents, a greater TDS would be deducted, which can be claimed when filing an ITR.
Deduction of expenses from dividend income
The Finance Act of 2020 also allows for interest expense to be deducted from the payout.
The deduction should not be more than 20% of the dividend income. You cannot, however, claim a deduction for any other expenses involved in producing the dividend income, such as commissions or salary expenses.
Only Rs 1,200 is permissible as an interest deduction if Mr Ravi borrowed money to invest in equity shares and paid interest of Rs 2,700 during FY 2020-21.
Are dividends considered income?
Capital gains and dividend income are both sources of profit for owners and can result in tax liability. Here are the distinctions and what they represent in terms of investments and taxes paid.
The original investment is referred to as capital. As a result, a capital gain occurs when an investment is sold at a higher price than when it was purchased. Capital gains are not realized until investors sell their investments and take profits.
Dividend income is money distributed to stockholders from a corporation’s profits. It is treated as income rather than a capital gain for that tax year. The federal government of the United States, on the other hand, taxes eligible dividends as capital gains rather than income.
Are dividends taxable when declared or paid Australia?
Dividends on stocks Even if you spend your dividend to purchase more shares – for example, through a dividend reinvestment plan – you must report all dividend income on your tax return. Dividends are taxable in the year they are paid or credited to you.
What are dividends taxed at 2020?
If you’re in the 27 percent tax rate, your nonqualified dividends will be subject to a 27 percent dividend tax. Despite the fact that nonqualified dividends are taxed at a lower rate, there are specific situations where an investor will pay a higher tax rate on dividends regardless of their classification.
Declaration
Companies inform the market when and how much they intend to pay in dividends. In most cases, they will also issue a letter to shareholders informing them of the dividend. The process is known as ‘declaring a dividend.’
Ex-dividend date
The ‘ex dividend’ date will be stated in the company’s dividend announcement. You must own the shares on the ex-dividend date in order to collect the dividend; in practice, this means you must have purchased the shares prior to the ex-dividend date.
The company’s share price will often drop by about the amount of the dividend on the ex-dividend date, reflecting the fact that buyers after that day will not be eligible for that payment.
Payment date
The payment date is when the corporation pays the dividend to shareholders, as the name implies. The payout date is normally between four and eight weeks after the ex-dividend date.
Franking credits
In Australia, dividends are frequently accompanied by franking (or imputation) credits, which are additional tax credits. Dividends are paid from a company’s profits, while franking credits are the taxes paid on those profits that have already been paid.
The effect of franking credits on Australian investors is that their taxable income may be reduced. This is because franking credits are tax credits for dividends that have already been paid (by the company, at the company tax rate).
Investors with a low marginal tax rate may be eligible to claim a refund on some or all of their franking credits, and thus receive money back from the Australian Taxation Office when tax time comes around.
Dividend Reinvestment Plans (DRPs)
Some businesses allow shareholders to reinvest dividends in the form of additional company shares rather than cash. This is referred to as a dividend reinvestment strategy (DRP). To encourage owners to continue reinvesting in the company, DRP shares are occasionally sold at a discount to the current market price.
Do I report dividends on my taxes?
Dividends are all taxable, and all dividend income is required to be recorded. This includes dividends that have been reinvested in the stock market. If you didn’t receive either form but did receive dividends in whatever amount, you should still report it on your tax return.
Are dividends taxed when declared or paid?
Investors pay taxes on dividends in the year they are declared, not in the year they are paid. The regulations governing spillover dividends are more complicated for particular business entities.
Is dividend taxable in 2021?
The entire amount of dividend income is taxable in the hands of shareholders in 2021-22, and the Rs. 10 lakhs threshold limit set out in section 115BBDA has no impact.
Is dividend taxable in the hands of shareholder?
From FY 2020-21, is the stated dividend on shares taxable? The dividend amount I got on shares is reported in Form 26AS, but no TDS is shown. If the dividend amount is less than Rs 5,000, is TDS deducted?
Dividends declared and dispersed on or after April 1, 2020, are taxable in the hands of the shareholders who received them. If the amount received in a year exceeds Rs 5,000, the dividend income is subject to a 10% TDS. When submitting an ITR, you must state the total amount of all dividend income obtained in the fiscal year under the heading “other sources,” and the TDS deducted (as shown on Form 26AS) will be granted as a credit against the ultimate tax liability.
