A plain-English guide to how dividends, franking credits, ETF distributions and capital gains tax work for Australian share investors, and the records you need.
More Australians than ever invest in shares and exchange traded funds (ETFs), often through low-cost trading apps. Investing is simple to start, but the tax side catches many people out at tax time. This guide explains how your investment income is taxed and the mistakes we see most often.
Dividends you receive are part of your assessable income, whether they are paid into your bank account or reinvested. Many Australian companies pay franked dividends, which means the company has already paid tax on the profits. The tax paid is passed to you as a franking credit.
In your tax return you include both the dividend and the franking credit, then claim the franking credit back as a tax offset. If your franking credits are more than the tax you owe, the ATO refunds the difference to you as an individual. This is why franked dividends can be very tax-effective for people on lower incomes or in retirement.
To claim franking credits, you generally need to hold the shares “at risk” for at least 45 days (not counting the days you buy and sell). This holding period rule does not apply if your total franking credits for the year are under $5,000.
If you join a dividend reinvestment plan (DRP), you receive new shares instead of cash. The dividend is still taxable in the year it is paid, even though you never received the money. Each new parcel of shares also has its own cost base and purchase date, which matters when you sell later. Keep every DRP statement.
ETFs pass on the income they earn as distributions, which can include Australian dividends, franking credits, foreign income, interest and capital gains. After 30 June your ETF provider issues an annual tax statement (often called an AMMA statement) that splits each distribution into these parts. These statements often arrive in July to September, so wait for them before you lodge. The statement may also show cost base adjustments that change your capital gain when you sell.
When you sell shares or ETF units, you make a capital gain or loss: the sale price minus your cost base. Your cost base includes the purchase price plus brokerage on both buying and selling.
Dividends from overseas companies are taxable in Australia. If foreign tax was withheld, you can usually claim a foreign income tax offset so you are not taxed twice. Gains on foreign shares are also subject to Australian capital gains tax, converted to Australian dollars at the relevant dates.
You may be able to claim interest on a loan used to buy income-producing shares, ongoing investment advice fees, and subscriptions to investment publications. Brokerage is not deducted but forms part of your cost base.
The ATO pre-fills a lot of dividend and share sale data, but it is often incomplete, especially for DRPs, ETFs and foreign shares. Keep your buy and sell contract notes, DRP statements and annual tax statements together in one place. If you have sold investments this year, talk to us before you lodge so we can calculate your gain correctly and apply every discount and loss available.
