Dividends
A share of the profits
Your reward for investing in a company is a share of its
earnings, called dividends. These are distributed to a company's
shareholders from its profits, and are usually paid twice a
year.
However, there is no guarantee you will receive dividends at
all. The size of the dividend may vary, depending on how well the
company performs. Certain types of companies will pay more
dividends than others. For example, financial companies usually pay
more than mining companies. Here's a guide to what to do with your
dividends.
Keep a record of how much you
get
Like any income, you need to include the dividends you receive
on your tax return. Keep any transaction statements you get about
your dividends, because you will need these to work out your tax.
You can also find the details of dividends per share on the
company's website or on the Australian Securities
Exchange (ASX).
Bonus tax credits
Companies pay tax on their profits. When after-tax profits are
distributed as dividends they are described as being
'franked'. Franked dividends come with a franking credit, which
represents the amount of tax the company has already paid. Franking
credits are also known as imputation credits.
When you work out your tax, you will get a credit for any tax
the company has paid. If your top tax rate is less than the
company's tax rate (i.e. you would have paid less tax than the
company did) the Australian Tax Office will refund you the
difference. More information can be found on ASX's dividend webpage.
Case study: Ricardo gets a refund from his tax credit
Ricardo has shares in a
company. The company pays him a fully franked dividend of $700. The
dividend statement says there is a franking credit of $300. This
represents the tax the company has already paid. This means the
dividend, before company tax was deducted, would have been $1,000
($700 + $300).
At tax time, Ricardo must declare $1,000 (the $700 dividend plus
the $300 franking credit) in his taxable income. If his marginal
tax rate was 19%, he would normally pay $190 tax on the dividend.
Because the company has already paid $300 in tax, Ricardo will get
a refund for the difference, $110.
If Ricardo was in a higher tax bracket he may not have been
entitled to a refund of any of the franking credit, he may even
have to pay additional tax. However, if he is a low income earner,
it is possible to be refunded the full amount of the franking
credit.
Reinvest what you can
afford
Some companies will offer to reinvest your dividend for you by
issuing you with more shares in the company instead of a cash
dividend. This is known as a dividend reinvestment plan. Some
companies that have a dividend reinvestment plan may offer you a
discount on the share price to encourage further investment.
If you are having your dividends reinvested it is important to
know that the income still needs to be included in your tax return,
even if you did not physically receive it. As far as the tax man is
concerned, you received a cash dividend and used it to buy more
shares.
Whether you choose to reinvest your dividends may depend on
whether you bought the shares for capital growth or for income
purposes. You may also choose to use your dividends to invest in
different shares or other assets in order to diversify your asset
portfolio.
Make sure you keep track of your dividend
payments and any tax credits you are entitled to.
Related links
Last updated: 11 Dec 2018
