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Tax & Dividend Deductions: How Your Investment Income Is Affected

One in every three adult Australians own shares listed on stock markets which makes it the highest proportion of share ownership in the world.

Whether your shares (private or public) are invested through self-managed super funds (SMSF) or as an individual the profits from your stock trading will be treated as income and taxed accordingly.

However, there are certain deductions and exemptions that apply to income derived from your investment activities.

In this article, we look at how taxes on dividends work and how you can maximise your tax deductions due to expenses you incur in earning interest, dividends, and other investment incomes.

How Tax On Dividends Work

Not all companies pay dividends to their shareholders. Those that do will usually pay out a percentage of their after-tax profit to shareholders at the end of each financial year

Because companies pay dividends on profits after-tax, which currently sits at 30% for large companies, ATO allows shareholders to claim credit for any tax the company has paid that way shareholders don’t get taxed twice on the same profit.

After ATO refunds the difference, you’ll still be liable to pay taxes on dividend income which will depend on your marginal tax rate.

To fully understand how the tax on dividends works, consider the following example:

Let’s say you have Investor 1, Invest 2 and Investor 3 all own 1000 shares in ABC Ltd at the start of the financial year

Let’s also say ABC is a large company which means its current tax rate will be 30% (26% for smaller companies) and it decides to invest back 50% of the profit back into the business but pay all its investors the remaining 50% of the total profit.

If company ABC makes $10 profit per share and pays 30% ($3) of that profit to the tax authorities then that means all the investors will be eligible to be paid $3.5 per share in dividends of the remaining $7 per share after taxes (the other $3.5 is invested back into the company).

Now the interesting part.

Because shareholders can claim 30% imputation credit (not physically received but can be declared) then that means, hypothetically, that imputation credit of (3.5X30/70) = $1.5 per share can be claimed when filing for your taxes.

With 1000 shares per investor, that brings their total taxable income to $3500 (dividend income) plus $1500 (imputation credit) which comes to $5000 per investor.

Moving on further, if perhaps the three investors are in different tax brackets, the following table shows how they’ll be taxed based on their tax bracket.

Investor 1Investor 2Investor 3
BioLow income earnerInvested in SMSF, in accumulation phaseMiddle income earner
Tax rate0%15%32.5%
Imputation credit$1500$1500$1500
Taxable Income$5000$5000$5000
Tax payable$0$750$1625
credit rebate$1500$1500$1500
Tax payable (refundable)($1500)($750)$125
Income after tax$5000$4250$3375

From the table above, Investors 1 and 2 both receive funds because their imputation credit is greater than their tax payable to the ATO.

Investor 3, on the other end, because of his higher tax bracket his imputation credit couldn’t offset the amount of tax payable and thus why will pay $125 extra in taxes.

The takeaway here is if your dividend is fully franked, and your marginal tax rate is lower than the corporate tax rate, then you may potentially receive the franked credit as a refund.

What You Can Claim

Now that we’ve covered how dividends work and how you can claim your imputation credit, let’s look into expenses you can claim as part of your investment income and thus reduce your tax burden.

ATO says you can claim deductions for expenses you incur in earning dividends and other investment income.

The following are some of the expenses you can claim:

  • ongoing management fees or retainers
  • Investment professional consultation fees
  • a portion of other costs you incur in managing the investments, such as: 
    • some travel expenses
    • the cost of specialist investment journals and subscriptions
    • borrowing costs
    • the cost of internet access
    • the decline in value of your computer

Back to our example above, if Investor 3 had paid $500 in management fee to his financial advisor then he can claim that expense when doing his tax filing. This way, Investor 3’s taxable income will be $4500 instead of $5000 which puts his total tax liability at $1463.

After this deduction, this would mean Investor 3 now has their imputation credit of $1500 and tax liability of $1463 which then means he would end up not paying any taxes on dividend income of $3500, and would instead receive a $37 tax refund.

With the service and help of tax accountants like our team in Brisbane, you can claim all the deductions mentioned above and more if they apply to your particular case.

What You Can’t Claim

In addition to knowing what you can claim, it’s also important to know what you can’t claim.

As ATO explains it, paraphrased: 

The cost of acquiring shares cannot be claimed as expenses for your tax returns. The only exception applies if you’re a broker or share trader in which case you can claim brokerage expenses and other expenses necessary to making trades and keeping records. When the time comes to finally dispose of the shares, you can claim these as part of the cost base for capital gains tax purposes. 

Tax Delivery Is Your Investment Partner You Can Trust

When it comes to maximising your after-tax returns from dividend income, nobody knows better than your trusted tax accountants team here at Tax Delivery.

Delivering a personalised and tailored service to ensure you’re in the best financial position possible is what we do here at Tax Delivery.

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