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Investing in shares can offer the potential for capital gains, but it can also provide income along the way.
That income may come from dividends, ETF distributions, franking credits or other distribution components.
Like other forms of income, investment income may need to be included in your tax reporting.
This article gives you a short overview of investment income tax in Australia, focusing on two common sources: dividends from ordinary shares and ETF distributions.
This article is general information only. It does not take into account your personal circumstances and is not financial, legal or tax advice.
Dividends from ordinary shares
What are dividends?
Dividends are payments made by a company to its shareholders.
They are usually paid from company profits and can provide investors with income while they continue holding the shares.
How are dividends taxed?
In Australia, dividends are generally treated as taxable income.
They are commonly paid as:
- franked dividends
- unfranked dividends
- partly franked dividends
Franked dividends include franking credits. These credits reflect tax the company has already paid on the profits used to pay the dividend.
Unfranked dividends do not include franking credits.
Your dividend statement will usually show the cash dividend, any franked or unfranked amount, franking credits and the payment date. These details matter when reviewing your tax reporting.
Key considerations for dividend income
Franking credits
Franking credits can affect how dividend income is reported and taxed.
They may reduce tax payable depending on your circumstances and eligibility.
Dividend reinvestment plans
Some companies offer dividend reinvestment plans, often called DRPs.
A DRP lets you reinvest a dividend into more shares instead of receiving the income as cash.
Even if a dividend is reinvested, it may still need to be reported as income. The new shares may also affect your cost base for future capital gains tax calculations.
Holding period rules
Rules can apply to whether franking credits are available to claim.
This can include holding period rules, depending on your circumstances.
If you are unsure, check with a qualified accountant or tax adviser.
ETF distributions
What are ETF distributions?
Exchange-traded funds, or ETFs, are investment funds traded on stock exchanges.
They pool money from investors and invest across a group of assets, such as shares, bonds or other investments.
ETFs can pay distributions to investors. These distributions may include income from dividends, interest, foreign income, capital gains or other components.
Tax components of ETF distributions
ETF distributions can be more complex than ordinary company dividends.
That is because a single ETF distribution may include several tax components, such as:
- franked income
- unfranked income
- franking credits
- interest income
- capital gains components
- foreign income
- foreign tax offsets
- non-assessable amounts or cost base adjustments
The cash amount you receive may not show the full tax picture.
This is why ETF annual tax statements are important. They break down the final tax components of your distributions and can help you review your reporting more accurately.
Key considerations for ETF distributions
Annual tax statements
ETF providers usually issue annual tax statements after the end of the financial year.
These statements can show the tax components of your distributions in more detail than your cash payments alone.
Foreign income and tax offsets
If an ETF invests in overseas assets, some of the distribution may relate to foreign income.
There may also be foreign tax offsets, depending on the fund and your circumstances.
Cost base adjustments
Some ETF distribution components may affect your cost base rather than simply being treated as cash income.
This can matter when calculating capital gains or losses later.
Final thoughts
Investment income from dividends and ETF distributions can be an important part of your portfolio return.
But the tax details can vary depending on the type of income, whether franking credits apply, whether you use DRPs, and how ETF distributions are reported.
Good records make this easier.
Dividend statements, ETF annual tax statements, DRP records and portfolio income records can all help you review your investment income more clearly at tax time.
Track your dividends and portfolio income with Navexa
Navexa helps Australian investors track portfolio performance, dividends, distributions, franking credits, realised gains, unrealised gains and tax reporting data in one place.
You can use Navexa to review your income records and prepare clearer information before speaking with your accountant or tax adviser.
Start your 14-day free trial and see how clearer portfolio tracking can help you stay organised.
Disclaimer: This article is general information only and does not constitute financial, legal or tax advice. It does not take into account your personal circumstances. Tax rules, platform features and legislation may change. Always speak with a qualified professional before making financial, legal or tax decisions.
