Australia Investment Income Tax Guide
Australian investment income taxation. The guide covers: the dividends and the franking credits (the "dividend imputation") — the dividends paid by the Australian resident companies to the Australian resident shareholders are included in the assessable income (the "dividend income"); the franking credits attached to the dividends (the "franking credits" or the "imputation credits") are also included in the assessable income; the tax liability on the dividend is offset by the franking credits; if the franking credits exceed the tax liability, the excess is refundable to the individuals and the superannuation funds (the "excess franking credits refund"); the types of the dividends — the "fully franked dividends" (the "franked dividends" — the dividends with the franking credits attached at the corporate tax rate), the "partly franked dividends" (the "partly franked dividends" — the dividends with the franking credits attached at the rate lower than the corporate tax rate), the "unfranked dividends" (the "unfranked dividends" — the dividends WITHOUT the franking credits), the "deemed dividends" (the "deemed dividends" — the benefits provided by the company to the shareholder that are treated as the dividends under the "Division 7A" rules); the interest income — the interest income from the bank accounts, the term deposits, the bonds, the debentures, and the loans is included in the assessable income and taxed at the marginal rate; the interest income is subject to the "withholding tax" for the foreign residents (the "interest withholding tax" at 10%); the "low-income earners" may be eligible for the "low-income tax offset" (the "LITO") to reduce the tax on the interest income; the capital gains on the shares and the ETFs — the capital gain on the disposal of the shares and the ETFs is included in the assessable income; the 50% CGT discount applies to the shares and the ETFs held for at least 12 months; the capital loss on the shares can be offset against the capital gains from the other assets; the "dividend stripping" rules — the "dividend stripping" rules (the "Part IVA" — the general anti-avoidance provisions) prevent the taxpayers from obtaining the tax advantage by the "stripping" of the franking credits; the "dividend washing" rules (the "dividend washing" — the purchase of the shares after the "ex-dividend date" and the sale of the shares before the "record date") are prohibited from 1 July 2024; the investment expenses — the investment expenses that are deductible include: (a) the "interest on the investment loan" (the "margin loan" interest — the interest on the loan used to acquire the shares or the ETFs), (b) the "brokerage fees" (the "brokerage" on the purchase and the sale — the brokerage is included in the cost base for the CGT purposes, NOT deducted), (c) the "management fees" (the "management expense ratio" — the "MER" for the managed funds and the ETFs — the MER is deducted from the fund income, NOT separately deducted), (d) the "advice fees" (the "financial planning fees" — the fees for the investment advice are deductible up to the "first $5,000" and the "ongoing fees" are deductible), (e) the "custodian fees" (the "custodian fees" for the holding of the shares); the tax-effective investment strategies — the tax-effective strategies include: (a) the "negative gearing" (the "negative gearing" — the investment loan interest exceeds the investment income, the net loss is offset against the other income), (b) the "dividend imputation" (the "franking credits" reduce the tax on the dividend income and can generate the refund), (c) the "CGT discount" (the "50% CGT discount" for the assets held for at least 12 months), (d) the "superannuation contributions" (the "concessional contributions" taxed at 15% in the superannuation fund), (e) the "tax loss harvesting" (the "tax loss harvesting" — the sale of the underperforming shares to realise the capital losses to offset the capital gains). All amounts in Australian Dollars (AUD). For related reading, see our Corporate Tax Guide → and Capital Gains Tax Guide →.
Franking Credits
- How they work: The Australian company pays the corporate tax on the profits and attaches the franking credits to the dividends. The shareholder includes both the dividend and the franking credit in the assessable income. The tax on the dividend is offset by the franking credit. For the base rate entity (25%), the franking credit is 25/75 of the dividend. For the 30% company, the franking credit is 30/70 of the dividend.
- Refundable excess: The individuals and the superannuation funds can receive the refund of the excess franking credits. For example, if the tax liability is $1,000 and the franking credits are $2,000, the taxpayer receives the refund of $1,000. The companies and the non-individual entities cannot receive the refund (the excess is carried forward).
For the Division 7A rules and the deemed dividends from the private companies, see our Corporate Tax Guide →.
CGT on Shares — 12-Month Rule
- 50% discount: The Australian resident individuals are entitled to the 50% CGT discount on the shares held for at least 12 months. The discounted gain is included in the assessable income. The companies do NOT receive the CGT discount. The superannuation funds receive the 33.33% discount.
- Capital losses: The capital losses on the shares can be offset against the capital gains from the same year. The excess losses can be carried forward to the future years (the "capital loss carry-forward"). The capital losses cannot be offset against the ordinary income (the "quarantine" of the capital losses).
For the tax-effective investment strategies for the high-income earners, see our Superannuation Guide →.