How Much Tax Do You Pay on Shares in Australia?

Investors in Australia who acquire shares face tax obligations on the income and profits generated from these investments. Income derived from shares is subject to taxation through two primary mechanisms: dividends and capital gains.

Taxation of Dividends

A dividend represents a portion of a company’s profits distributed to its shareholders. In Australia, the taxation of these distributions from resident companies operates under an imputation system designed to prevent double taxation. Dividends can be either “franked” or “unfranked,” a distinction that significantly impacts an investor’s tax liability.

Franked dividends come with a franking credit, which signifies that the company has already paid tax on the profits from which the dividend is distributed. This credit is passed on to the shareholder and represents the tax already paid by the company, typically at the corporate tax rate of 30%. The imputation system allows shareholders to use these franking credits as a tax offset against their personal income tax, reducing the amount of tax payable on the dividend or potentially resulting in a refund if the credits exceed their tax liability.

For example, if an investor receives a fully franked dividend, the cash amount of the dividend is “grossed up” by the franking credit to reflect the company’s pre-tax profit. This grossed-up amount is then included in the investor’s assessable income and taxed at their marginal tax rate. The franking credit is then applied as a direct offset against this tax, ensuring that the investor only pays the difference between their marginal tax rate and the company tax rate already paid. Conversely, unfranked dividends do not carry franking credits, meaning the company has not paid tax on those specific profits. The full amount of the unfranked dividend is included in the investor’s assessable income and taxed entirely at their individual marginal tax rate without any offset.

Dividends received from foreign shares are treated differently, as they do not come with Australian franking credits. These dividends are included in an investor’s assessable income as foreign income. If foreign tax was withheld on these dividends, investors may claim a foreign income tax offset (FITO) to prevent double taxation. All dividends, whether franked or unfranked, are treated as assessable income in the financial year they are received.

Taxation of Capital Gains

Capital gains tax (CGT) applies when an investor sells shares for more than their original cost, resulting in a profit. CGT is not a separate tax but forms part of an individual’s income tax liability, meaning any net capital gain is included in assessable income and taxed at the investor’s marginal tax rate. A capital gains event is triggered by occurrences such as the sale of shares, gifting shares, a company acquisition or merger, or shares being declared worthless by a liquidator.

Calculating a capital gain or loss involves determining the difference between the capital proceeds and the cost base of the shares. Capital proceeds refer to the money or value received from selling or disposing of the shares. The cost base includes the original purchase price of the shares plus any incidental costs associated with acquiring and disposing of them, such as brokerage fees or stamp duty. If the capital proceeds are less than the cost base, a capital loss occurs.

A 50% CGT discount is available to individuals who hold shares for more than 12 months. This allows individuals to reduce their capital gain by half before it is added to their assessable income. For instance, if a capital gain of $10,000 is realised from shares held for over a year, only $5,000 of that gain would be included in taxable income.

Capital losses can be offset against current year capital gains, or carried forward indefinitely to offset future capital gains, but they cannot be used to reduce other types of income. The Australian Taxation Office (ATO) also scrutinises “wash sales,” which involve selling an asset to realise a capital loss and then repurchasing a substantially identical asset shortly after.

Reporting and Record Keeping for Shares

Maintaining accurate and comprehensive records for all share transactions is important for meeting tax obligations in Australia. Investors should keep detailed documentation for both income from dividends and any capital gains or losses incurred. These records serve as evidence for claims made in a tax return and are important if the Australian Taxation Office (ATO) conducts a review or audit.

Essential records include purchase dates, sale dates, purchase and sale prices, and all associated incidental costs such as brokerage fees. Investors also need to retain dividend statements, which detail the amount of dividends received and any attached franking credits. For foreign shares, documentation of foreign taxes withheld is also necessary. These records should be kept for at least five years from the date the relevant tax return was lodged.

Share income and capital gains or losses are reported through an individual’s annual Australian tax return. This can be completed online using the ATO’s myGov platform, through a registered tax agent, or via paper forms. The ATO often pre-fills certain information, such as dividend income from Australian companies, directly into an individual’s tax return. While this pre-filled data can simplify the process, it is important for investors to verify its accuracy against their own records before lodging their return.