Dividend Income

What is dividend income?

If you own shares in a company you will generally receive your entitlement to company profits in the form of dividends. In your tax return you must declare all dividends received. This includes dividends applied to a dividend reinvestment plan.

Non-resident companies

If you own shares in a non-resident company, any dividend you receive from that company will also need to be included as income if you are a resident of Australia for tax purposes. If you have paid tax on the dividend in the foreign country, such as dividend withholding tax, you may be entitled to a credit in your Australian return for the foreign tax paid.

Dividend Statement

If an Australian company pays or credits you a dividend, the company should send you a dividend statement advising:

	The amount of the dividend that is unfranked
	The amount of the dividend that is franked
	The amount of franking credit
	The amount of Tax File Number (TFN) withholding tax withheld, if you have not quoted your TFN to the company.

Franking credits

Franking credits eliminate the ‘double taxation’ of company profits. Double taxation occurs where the company pays tax on its profits and the individual also pays tax on their dividend income received from the company. To prevent double taxation, the dividend paid by the company out of after tax-profits has associated franking credits. These types of dividends are called franked dividends. Unfranked dividends do not have any attached franking credits. Franking credits are offset against the individual’s tax payable. Where franking credits are in excess of the tax payable, they are refunded.

Comparison of franked and unfranked dividends

For the year ended 30 June 2009, assume an individual has salary income of $60,000 and dividend income of $7,000. The following is a comparison of the tax positions of the individual with either an unfranked or franked dividend.

It is important to note that the franking credits are added to the individual’s taxable income to reflect the income derived by the company before it paid the company tax. The individual then receives a credit for the tax the company paid. As the example illustrates, the fully franked dividend is more tax effective.

Holding period rule

You must own your shares for at least 45 days (90 days for preference shares) in order to claim franking credits. However, this rule does not apply if your franking credit entitlement from all shares is below $5,000 per annum. This is equivalent to fully franked dividends totalling $11,666.

Benefits for individuals

Taxpayers should consider holding shares in the name of the lower income earning spouse. This results in savings from refunds of excess franking credits, and also enables capital gains tax savings on the sale of investments. Refunds of franking credits are available to minors, but their income is subject to penalty marginal tax rates. You may wish to further discuss these issues with us prior to purchasing investments.

Charities

Charities, charitable trusts and deductible gift recipients are entitled to claim refunds of franking credits. As these organisations pay no tax, all franking credits are refunded in full.

How to obtain a refund

The existing legislation allows the refund of franking credits through the lodgement of an income tax return, or if no income tax return is required, by lodging a Refund of Franking Credits application. This form can be downloaded from http://www.ato.gov.au/content/downloads/IND00138949n41050608.pdf

Published : 18 September 2008