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  • How does a company pay out its profits?

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

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    Dividends

    If you own shares in a company you will generally be paid your share of the company's profits as a dividend. In any financial year you may receive both an interim and a final dividend. In most circumstances you will be liable to pay income tax for that financial year on the dividends you are paid or credited.

    You must include dividends paid to you in your assessable income. Your shareholder dividend statement should contain details of the date a payment was made to you-generally referred to on the statement as the payment date or date paid. Where the dividend is paid by cheque, it is deemed to have been paid on the date the company posted the cheque to you-not on the date the cheque was received, banked or cleared.

    A dividend can be paid to you as money or other property, including shares.

    Dividend reinvestment schemes

    Most dividends you are paid or credited will be in the form of money, either by cheque or credit in a bank account. However, the company may give you the option of reinvesting your dividends in the form of new shares in the company. This is called a dividend reinvestment scheme. If you take this option you must pay tax on your reinvested dividends just as you would on cash dividends.

    Bonus shares

    Most bonus share issues before 1 July 1987 were paid out of a company's non-taxable capital profits, from asset revaluations or from share premiums. Bonus shares issued in those circumstances are not treated as taxable dividends.

    The paid-up value of most bonus shares issued from 1 July 1987 to 30 June 1998 is taxed as a dividend. The only exception to this rule is where the bonus shares are paid out of a genuine share premium account. In this case the paid-up value of the bonus shares is not treated as a dividend.

    From 1 July 1998, the paid-up value of bonus shares is generally not taxed as a dividend. However, if you received bonus shares on or after 20 September 1985, you may have to pay capital gains tax if you make a capital gain when you dispose of them. For more information see the publication Guide to Capital Gains Tax.

    If you are paid or credited taxable bonus shares the company issuing the shares should provide you with a dividend statement indicating the share value that is subject to tax. It should also advise you when it issues tax-free bonus shares out of a share premium account.

    Deemed dividends

    Payments or other benefits you obtain from a private company in which you are a shareholder, or an associate of a shareholder, may be treated as if they were a taxable dividend paid to you. For more information, read the sections Deemed dividends, Transactions that will create deemed dividends and Amounts that will not be deemed to be dividends.

    Last modified: 23 Dec 2019QC 16138