The benefit of dividends


As a shareholder you receive a share in the company’s profits or earnings by being paid a dividend. Think of your dividend like interest on a term deposit – it is the income you earn from the investment.

Generally Australian listed companies pay dividends twice each year. There is no requirement for the company to pay a dividend from earnings and they may instead choose to elect to reinvest the earnings back into the business. Again this is similar to a term deposit if the interest was reinvested and not paid out to you.

Dividends that are paid to shareholders are taxed under a system known as imputation. What this means is that the tax that the company pays is imputed or attributed to the shareholders.   The company tax that is paid by the company is allocated to shareholders by imputation credits attached to the dividends they receive. This means that tax is already paid on this dividend to the extent that they have imputation credits. Imputation credits prevent the double taxation of dividends.

The imputation credit is a tax offset and will cover, in part or full, the tax payable on the dividends by the shareholder or individual. If the tax offset is more than the tax payable on the dividends, the excess tax offset will be applied to any tax payable on other taxable income you received. If any excess tax offset amount is left over after that, the Australian Taxation Office will refund that amount to you.

For example, if the company makes $100 profit and paid 30 per cent tax ($30) on this profit, it would effectively have $70 left over. If it paid that $70 to you as a shareholder, an imputation credit of $30 would be attached.

Let’s look at some scenarios to see how this would work: 

Scenario 1 – If your tax rate is 30 per centWhen you include the dividend in your tax return, if your tax rate is 30 per cent, then you would not pay any tax on the dividend as the company has already paid the 30 per cent for you.  You effectively get the dividend tax free.

Scenario 2 – If your tax rate is 46.5 per cent (earn over $180,000) If your personal tax rate is 46.5 per cent, you would only pay tax of 16.5 per cent (46.5 per cent -30 per cent) on the dividend as the first 30 per cent has already been paid.

Scenario 3 – low income earner or super fund in accumulation If your tax rate is say 15  per cent, the fund would pay no tax on the dividend as 30 per cent has already been paid and you would be refunded an additional 15 per cent, being the excess above 15 per cent.

Scenario 4 – No income personally or super fund in pension phase If you have no taxable income, you would pay no tax on the dividend. In addition, the Australian Taxation Office would send you a refund for the entire 30 per cent tax credit that the company has already paid. Effectively you are getting a tax refund of $30 for tax that has already been paid by the company you invested in.

Franking credits provide additional return to investors and is one of the reasons why investors prefer to invest in shares over other asset classes where there are no tax credits on the income derived.
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