Maximising Dividend Deductions for Shareholders

Investing in shares and receiving dividends comes with tax implications. Let's take some time out and learn how to maximise your tax deductions for dividends.We'll explain what dividend deductions are available to individual taxpayers.

Index

1. What Are Dividend Deductions?
2. Types of Dividends
   • Franked Dividends
   • Unfranked Dividends
3. Tax Deductions for Individual Shareholders
   • Interest on Borrowed Funds
   • Management Fees
   • Investment-Related Travel Expenses
   • Cost of Investment Publications and Research
   • Internet and Phone Costs
   • Dividend Reinvestment Plans (DRPs)
4. How about an Example? 
5. Final Thought

What Are Dividend Deductions?

Dividends are payments made by a company to its shareholders, usually in the form of cash or additional shares. Dividends paid to shareholders by Australian resident companies are taxed under a system known as ‘imputation.’ This means that the tax paid by the company is allocated to shareholders as franking credits attached to the dividends they receive.

Types of Dividends

Franked Dividends

Franked dividends come with franking credits, which represent the tax the company has already paid on its income. When you receive a franked dividend, you also get a franking credit, which can be used to offset your tax liability.

Example of Franked Dividends: Ashley receives a fully franked dividend of $700 with a franking credit of $300. On his tax return, Ashley must include both the $700 dividend and the $300 franking credit as assessable income. Tax is payable at Ashley's applicable tax rate on these amounts. However, Ashley is also entitled to a franking tax offset equal to the amount of the franking credit included in his income. This offset can be used to reduce his tax liability from all forms of income (not just dividends), and from his taxable net capital gain.

Unfranked Dividends

Unfranked dividends do not have franking credits attached. As a result, you will need to pay tax on the full amount of the dividend you receive.

Tax Deductions for Individual Shareholders

Individual taxpayers who invest in shares and receive dividends can claim several tax deductions related to their investment activities. Here are some common deductions:

Interest on Borrowed Funds

If you took out a loan to purchase shares, the interest on that loan is deductible. For example, if you borrowed $10,000 to buy shares and paid $500 in interest during the year, you can claim the $500 as a tax deduction.

Management Fees

Fees paid to a financial advisor or investment manager for managing your share portfolio can be claimed as a deduction. For instance, if you paid $200 in management fees, this amount is tax deductible.

Investment-Related Travel Expenses

If you travel to attend shareholder meetings or to consult with your financial advisor, you can claim travel expenses. For example, if you spent $100 on travel to attend a shareholder meeting, you can claim this as a tax deduction.

Cost of Investment Publications and Research

Subscriptions to investment magazines, newspapers, or online research services that help you make informed investment decisions can be deducted. For example, if you subscribed to an investment magazine for $50, you can claim this cost as a tax deduction.

Internet and Phone Costs

If you use your internet and phone to manage your investments, you can claim a portion of these costs. You need to keep a log to determine the percentage of use related to your investments.

Dividend Reinvestment Plans (DRPs)

If you participate in a DRP where dividends are reinvested to buy more shares, you can still claim the franking credits attached to those dividends.

How about an example?

Examples always help with our understanding.  Sarah invests in shares and receives $1,000 in dividends, with $300 in franking credits. She also paid $200 in interest on a loan used to purchase the shares, $100 in management fees, and $50 for an investment magazine subscription. On her tax return, Sarah will include the $1,000 dividend and the $300 franking credit as assessable income. She can then claim $200 for loan interest, $100 for management fees, and $50 for the magazine subscription as deductions.

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Final Thought

Individual taxpayers can optimise their tax situation and potentially reduce their taxable income, giving you a higher maximum refund. Always remember to keep accurate records and receipts to substantiate your claims. Make the most of your online income tax return by claiming all available deductions.

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