Income tax
Dividend
A dividend is a distribution of a company's profits to its shareholders, which is included in the shareholder's assessable income and may carry franking credits.
A dividend is the way a company shares its profits with its owners. The company pays an amount per share, and the shareholder includes that amount in their assessable income in the year it is paid. Dividends are one of the main ways that shareholders in a company, including owners of small private companies, receive a return on their investment.
Dividends can be paid in cash or by issuing further shares, and both forms may be assessable. They can be franked, partly franked or unfranked, depending on the tax the company has paid. The dividend statement shows these details and also shows any tax withheld. Declaring dividends correctly requires the franked and unfranked amounts, and the franking credit, to be shown separately in the return.
For private companies there are special rules. If a company lends money to a shareholder or an associate, or forgives a debt, or lets them use company assets, the amount may be treated as a deemed dividend under Division 7A. These rules, which are about loans and payments from private companies, are meant to stop profits being taken out as tax-free loans. They apply to many small business owners.
Directors of a company usually need to follow the company law requirements for paying dividends, including that the company must be solvent and that the payment is from profits. Minutes or a record of the declaration are usually kept. Tax practitioners often prepare these records as part of the end of year work for small companies.
The tax on a dividend received by an individual depends on their marginal rate, reduced by the franking credits. Resident individuals can receive a refund if credits exceed tax. Foreign residents are subject to dividend withholding tax on unfranked dividends, and fully franked dividends are generally exempt from the withholding tax.
Dividends are not subject to GST, since a dividend is a distribution and not a payment for a supply of goods or services. It sits outside the BAS system and is reported through the income tax return. Keep records for five years. This is general information only, so confirm how a dividend is treated with the ATO or a registered tax professional.
Worked example
Ravi owns a small company and the company pays him a fully franked dividend of $14,000 after paying 25% tax. The franking credit is $14,000 x 25/75 = $4,667 (rounded). Ravi includes $14,000 + $4,667 = $18,667 in assessable income. His tax on that is calculated at his marginal rate and then reduced by the $4,667 credit.
Practical tips
- Check the dividend statement for franked and unfranked amounts and include the franking credit in your return.
- Be careful with loans from your private company, since they can be deemed dividends.
- Keep a written record of dividend declarations for your company.