How are dividends taxed?
Profits or returns you make on your investments usually become part of your income for tax purposes.
Understanding how tax works in relation to your investments helps ensure you don't pay more tax than you need to, which we refer to as being 'tax-effective'.
Income you earn from investing in assets such as rent from property, dividends from shares or interest from a bank account will generally be taxed at your marginal tax rate.
Different tax rates will apply if you hold these assets in the form of a company, trust or Self-Managed Super Fund (SMSF).
Your marginal tax rate
Your marginal rate of tax is the income tax you will pay based on the tax scales set by the government. The table below sets out the individual income tax rates table for 2016/17. The tax you owe the government depend on what tax bracket you are in.
| Taxable income |
Tax on this income |
|---|---|
| $0 – $18,200 | Nil |
| $18,201 – $37,000 | 19c for each $1 over $18,200 |
| $37,001 – $80,000 | $3,572 plus 32.5c for each $1 over $37,000 |
| $80,001 – $180,000 | $17,547 plus 37c for each $1 over $80,000 |
| $180,001 and over | $54,547 plus 45c for each $1 over $180,000 |
The rates above do not include the Medicare levy of 2%.
Temporary Budget Repair Levy; this levy is payable at a rate of 2% for taxable incomes over $180,000.
These scales show the impact of earning an extra dollar and how much extra tax you will pay.
Example
If you earned $60,000 per year from employment and investments including share dividends, your tax, excluding Medicare levy, would be calculated like this:
| Taxable income | Tax rate | Tax payable |
|---|---|---|
| First $18,200 | x nil | = $0 |
| Next $18,800 ($18,200 - $37,000) | x 19c | = $3,572 |
| Next $23,000 ($37,000 - $60,000) | x 32.5c | = $7,475 |
| $60,000 | $11,047 |
Dividends
When a company makes a profit it can choose to either retain some profit for future expansion or make dividend payments to shareholders.
This payment is a portion of the company's profits. Companies pay dividends twice a year, usually as an 'interim' dividend in July and a 'final dividend' in December.
Dividends you have earned from shares are income for tax purposes. This means you will have to declare it on your tax return.
Tip! Keep any transaction statements you receive about your dividends, such as your dividend statements. You will need these statements to work out your tax.