Demystifying Dividends: How Are Dividends from My Business Taxed?

As a small or medium-sized business owner, you have a lot on your plate. Among the many complexities you face, understanding how dividends from your business are taxed can certainly rank as one worth dealing with!

With that in mind, we thought we’d give you some guidance below to help make the taxation of dividends a little more manageable. 

First, let's start by understanding what dividends are.

Put simply, dividends are essentially a portion of a company's profits distributed to its shareholders. They serve as a way to return capital to the shareholders and reward their investment in the company. It is of course important to note here that in the eyes of the Australian TaxOffice, dividends are considered income to the shareholder and are, therefore, subject to income tax.

The tax treatment of dividends can vary based on several factors, including the size of the dividend, your other sources of income, and whether the dividends are fully franked or unfranked.

Who’s Frank?

Fully franked dividends come with franking credits, also known as imputation credits.

These credits allow Australian companies to pass on the tax paid at the company level to their shareholders. When you receive fully franked dividends, the company has already paid tax on them. As a shareholder, you might be entitled to a tax offset, which helps avoid double taxation. If the franking credit exceeds your personal tax payable, you may even be eligible fora refund. However, if the franking credit is less than your personal tax payable, you will be liable for the shortfall.

On the other hand, unfranked dividends have not had any tax paid at the company level. As a result, these dividends are fully taxable to you as the shareholder.

Now, let's address some frequently asked questions regarding the taxation of dividends:

1. Do I have to declare dividends on my tax return? Yes, all dividends received, whether fully franked, partially franked, or unfranked, should be reported on your tax return. This includes dividends that were reinvested.
2. How does a dividend tax credit work? InAustralia, a franking credit or imputation credit is a credit for the tax a company has already paid on its profits. When a company distributes its profits as dividends, shareholders receive a franking credit that can be offset against their tax liability.

‍Important next steps …

Dividends can be a valuable income stream for you or your business, but understanding how they are taxed is crucial for effective tax planning. If you need help understanding how dividends from your business are taxed or have a complex tax situation with regards to dividends, our team atAttune Advisory will provide a comprehensive analysis of your specific situation, answer your questions, and guide you towards the best strategies for your financial success.

Make your financial situation your priority by booking an appointment via email or by giving us a call us on 1300 866 113.

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