Dividend Deductions: Your Australian Tax Compliance Guide

Dividend deductions play a crucial role in the Australian tax system, allowing investors to reduce their taxable income from share investments. 

This comprehensive guide will explore the intricacies of dividend deductions, providing valuable insights for Australian taxpayers.

What are dividend deductions?

Dividends are payments that companies make to their shareholders from their profits. When you own shares in a company, you may receive dividends as a form of income from your investment. In Australia, there’s a special system for taxing dividends called “dividend imputation.” This system is designed to be fair to shareholders by avoiding taxing the same money twice.

Here’s how it works:

• When a company makes a profit, it pays tax on that profit.
• When the company shares some of that profit with its shareholders (that’s what dividends are), it can pass along a kind of tax receipt called a “franking credit.”
• This franking credit shows how much tax the company has already paid on the money it’s giving to shareholders.
• Shareholders can use these franking credits to lower their own tax bills.

Let’s use an example to make this clearer:

Imagine you own shares in Koala Cola Company. This year, Koala Cola made a big profit and decided to share some of it with shareholders like you.

1. Koala Cola earned $100 in profit and paid $30 in company tax.
2. They decide to give you $70 as a dividend.
3. Along with your $70 dividend, Koala Cola also gives you a franking credit for $30 (the tax they paid).
4. When you do your taxes, you report $100 of income from Koala Cola ($70 dividend + $30 franking credit).
5. But, because Koala Cola already paid $30 in tax, you can use that $30 franking credit to reduce your own tax bill.

This system means you’re not paying tax on money that’s already been taxed at the company level. It’s like the government’s way of saying, “We won’t tax this money twice.” This approach helps make investing in Australian companies more attractive because it can lead to better after-tax returns for shareholders.

Need to get your Tax Compliance on track?

We're here to help your business move through the financial year with confidence. Book your free consultation today and discover how we can handle your tax compliance so you can focus on what you do best.

Get started

What can and cannot be claimed as dividend deductions?

In addition to the franking credit, there are several other expenses that investors can claim as deductions against their dividend income. These include: 

• Interest on loans used to purchase shares or other investments that generate dividend income
• Ongoing management fees or retainers paid to financial planners or investment advisors
• Fees for advice about changes in the investment mix
• Some travel expenses related to managing investments, such as attending annual general meetings
• Costs of specialist investment journals and subscriptions
• Internet access costs and computer depreciation related to managing investments
• Borrowing costs associated with share investments
• Postage and other costs directly connected to managing your investment portfolio

Here is how it works in practice. 

Meet Kim, an Australian investor who actively manages her share portfolio. Here’s a breakdown of her investment-related expenses for the tax year:

• Interest on a loan to purchase shares: $3,000
• Annual fee to her financial advisor: $1,500
• Subscription to a financial magazine: $200
• Travel costs to attend two AGMs: $450
• Internet costs (50% investment use): $300
• Depreciation on computer (40% investment use): $400
• Brokerage fees for buying shares: $250
• Postage for investment-related correspondence: $50

She can claim all of these expenses in full, except the $250 in brokerage fees, as an immediate deduction. She can also add the brokerage fees to the cost base of her shares for capital gains tax purposes.

• Kim’s total dividend income for the year: $12,000
• Total deductible expenses: $5,900

Kim’s taxable dividend income would be reduced from $12,000 to $6,100 ($12,000 – $5,900).

This example demonstrates how Australian investors can significantly reduce their taxable dividend income by claiming various investment-related expenses. 

It’s important to note that not all expenses can be claimed. You should pay attention to the types of costs you cannot claim against your taxable dividend income to avoid penalties and audits. These include: 

• The cost of purchasing shares (these are added to the cost base for capital gains tax purposes)
• Losses on selling shares (these are capital losses, not deductions)
• Fees for drawing up an investment plan, unless you’re operating an investment business
• Personal expenses unrelated to earning dividend income
• Costs of attending shareholder meetings for personal interest rather than investment management

How to claim dividend deductions

The process of claiming dividend deductions is pretty straightforward but requires you to be organised and manage all relevant documentation well. To claim dividend deductions on your tax return, follow these steps:

1. Gather all relevant documentation, including dividend statements and transaction records.
2. Report your dividend income, including any franking credits, on your tax return.
3. Calculate your total dividend deductions, including eligible expenses related to earning dividend income.
4. Enter the deduction amount in the appropriate section of your tax return.

You may want to use tax software or consult with a tax professional to ensure accurate claims, especially for complex investment portfolios.

Dividend deduction examples

Let’s consider some practical examples to illustrate how dividend deductions work. 

Example 1: Fully franked dividends

Sarah receives $1,000 in fully franked dividends from Company A. The dividend statement shows $428.57 in franking credits. Sarah’s taxable dividend income is $1,428.57 ($1,000 + $428.57), but she can claim the $428.57 as a tax offset, reducing her overall tax liability.

Example 2: Partially franked dividends

John receives $1,000 in dividends from Company B, which are 50% franked. The dividend statement shows $214.29 in franking credits. John’s taxable dividend income is $1,214.29 ($1,000 + $214.29), and he can claim the $214.29 as a tax offset.

Example 3: Unfranked dividends

Emma receives $1,000 in unfranked dividends from Company C. There are no franking credits attached. Emma’s taxable dividend income is $1,000, and they cannot claim any tax offset for these dividends.

Common mistakes to avoid when claiming dividend deductions

Ensuring tax compliance with the ATO is crucial for every type of tax claim, including dividend deductions. To avoid potential issues, here are some common mistakes and how you can avoid them. 

Misreporting dividend income 

It’s easy to get confused when reporting dividend income, especially if it comes from multiple sources. Some people may also forget to include franking credits in their reports. 

Example: Sarah received $5,000 in fully franked dividends but only reported the cash amount of $3,500 on her tax return, forgetting to include the $1,500 in franking credits.

Solution: Always report the full dividend amount, including franking credits. Use the information provided on your dividend statements to ensure accuracy. If you are unsure, tax software will typically generate the right amounts for you. If you have a complex investment portfolio, you may also want to consult a tax professional specialising in dividend income. 

Overclaiming or underclaiming deductions

Things like portioning expenses can be confusing when preparing your tax return. Also, it may be easy to forget expenses such as the Internet or the use of a computer when preparing your claim. 

Example: John claimed the full amount of his home Internet bill as a deduction, arguing that he uses the Internet to manage his share portfolio. However, he also uses the internet for personal purposes, so only a portion of the cost is claimable. 

Solution: Only claim the portion of expenses directly related to earning dividend income. Keep a log or diary to track the time spent using resources for investment purposes. For shared expenses like Internet costs, calculate a reasonable percentage based on investment-related usage.

Inadequate record-keeping

Staying organised is one of the biggest challenges people face when it comes to managing their taxes. It can be tedious and time-consuming to keep proper records. However, it’s a legal requirement and will help you ensure that you claim all eligible deductions. 

Example: Emma claimed travel expenses for attending a company’s annual general meeting but lost the receipts for her flight and accommodation.

Solution: Maintain a dedicated filing system for all investment-related documents, including dividend statements, receipts for expenses, and records of investment activities. Consider using digital tools or apps to scan and store receipts electronically for easy access and backup.

Ignoring changes in tax laws

The ATO frequently changes and updates tax laws. It can be daunting to stay updated on every small change, but it’s necessary to avoid potential surprises come tax time. 

Example: Tom missed the latest changes in ATO regulations and improperly claimed dividend deductions on their tax return. 

Solution: Regularly check the ATO website for updates on tax laws and guidelines. Subscribe to tax newsletters or follow reputable tax professionals on social media for timely updates. Consider engaging a tax professional who stays current with tax law changes.

Claiming non-deductible expenses

It might feel natural to include certain costs, such as purchasing shares, on your dividend deductions. However, these are not eligible. It’s important to avoid claiming personal expenses or costs not directly related to earning dividend income.

Example: Lisa claimed the cost of purchasing shares as a deduction against her dividend income, not realising that this is a capital expense and not immediately deductible.

Solution: Familiarise yourself with what can and cannot be claimed as a deduction. Use the ATO’s guidelines or consult with a tax professional to understand the difference between deductible expenses and capital costs. Keep a separate record of capital expenses for future capital gains tax calculations.

FAQ

Can I claim interest on loans used to purchase shares as a deduction?

Yes, you can claim interest on loans used to purchase shares as a deduction, provided the shares are expected to produce assessable dividend income.

Are franking credits considered as part of dividend deductions?

Franking credits are not technically deductions, but they act as tax offsets, reducing your overall tax liability on dividend income.

Can I claim the costs of attending shareholder meetings as a deduction?

You can claim travel expenses for attending shareholder meetings if the primary purpose is managing your investments. However, costs for attending meetings out of personal interest are not deductible.

Final thoughts

If you are an investor, it is important to understand dividend deductions to maximise your returns and ensure tax compliance. By carefully tracking your expenses, maintaining accurate records, and staying informed about tax regulations, you can make the most of the Australian dividend imputation system. 

Unsure how to claim dividend deductions on your tax return? Consult with a qualified tax professional for personalised advice tailored to your specific investment situation.