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  • Dividends paid or credited by non-resident companies

    Attention

    Warning:

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

    End of attention

    If you are a shareholder of a New Zealand company that has paid a dividend that is franked with Australian franking credits, you may be eligible to claim a franking tax offset. For more information on how to claim the franking tax offset, visit the business section of our website and click on 'Trans-Tasman imputation'.

    Non-resident companies, other than certain New Zealand companies, are not subject to the imputation system and you will not be entitled to claim a franking tax offset for any tax paid by the company.

    However, you may find that foreign tax has been withheld from the dividend so that the amount paid or credited to you is reduced.

    In most circumstances, you will be liable to pay Australian income tax on the dividend. You must include on your Tax return for individuals (supplementary section) 2005 the full amount of the dividend at item 19 Foreign source income and foreign assets or property. This means the amount you are paid or credited plus the amount of any foreign tax which has been deducted. You may be able to claim a credit for the foreign tax paid.

    In certain circumstances, foreign dividends may be exempt from tax. For example, they may be exempt to avoid any double taxation, or exempt because the portfolio out of which the dividends have been paid has already been taxed at a comparable rate.

    There are special rules which need to be satisfied for you to claim a foreign tax credit. See question 19 in TaxPack 2005 supplement and the publication How to claim a foreign tax credit 2004–05 (NAT 2338-6.2005).

    Example: Payments by foreign companies

    Emma Citizen has shares in a company resident in the United States. She was entitled to be paid a dividend of $400. Before she was paid the dividend the company deducted $60 in foreign tax, sending Emma the remaining $340. (Note: All amounts are in Australian dollars.)

    When she fills in her Australian tax return, Emma should include $400 at M item 19 on her tax return and she may be able to claim a foreign tax credit of $60 at O item 19.

    End of example

    Dividends denominated in a foreign currency

    All assessable dividends received that are denominated in a foreign currency must be translated into Australian dollars before being included on your Australian tax return. For more information on the exchange rates that should be used in translating foreign currency amounts, see Translation (conversion) rules.

    Dividends paid or credited to non-resident shareholders

    Non-resident individuals can also be paid or credited franked dividends or unfranked dividends from Australian resident companies. However, they are taxed differently from resident shareholders.

    If your residency status alters during the year (for example, you became a resident in the second half of the year) there may be occasions where withholding tax was not deducted from payments made to you before you became a resident. If this happens you should attach a schedule to your tax return explaining your circumstances. We will work out the amount of withholding tax you have to pay on these dividends and advise you of this amount.

    Franked dividends

    If you are a non-resident of Australia, any fully franked dividends you are paid or credited are exempt from Australian income and withholding taxes. However, you are not entitled to any franking tax offset for franked dividends. You cannot use any franking credit attached to franked dividends to reduce the amount of tax payable on other income and you cannot get a refund of the franking credit. You should not include the amount of any franked dividend or any franking credit on an Australian tax return.

    Unfranked dividends

    The other type of dividend a resident company may pay or credit you is an unfranked dividend. There is no franking credit attached to these dividends.

    Any unfranked dividends paid or credited to a non-resident are subject to a final withholding tax.

    Withholding tax is imposed on the full amount of the dividends - that is, no deductions may be made from the dividends, and a flat rate of withholding tax is applied whether or not you have other taxable Australian income. Withholding tax is also deducted from the unfranked portion of any partly franked dividends that you are paid or credited.

    Withholding tax is deducted by the company before a dividend is paid, so you will be paid or credited only the reduced amount. It is deducted at a rate of 30% unless you are a resident of a country with which Australia has entered into a taxation agreement that varies the amount of withholding tax that can be levied on dividends.

    Australia has entered into taxation agreements with more than 40 countries and the rate of withholding tax on dividends is limited to 15% in most of these agreements. Details of the rates that apply to residents of specific countries can be obtained from the Tax Office. Dividends paid on shares that are classified as non-equity shares under the debt/equity rules are treated as interest payments for withholding tax purposes. The rate of withholding tax on these payments is 10%.

    The withholding tax on unfranked dividends is a final tax, so you will have no further Australian tax liability on the dividend income. Therefore, if the only income you earned was dividend income which was a fully franked dividend or an unfranked amount of a dividend which was subject to withholding tax, you do not need to lodge an Australian tax return.

    If you were paid or credited dividends which were not fully franked - and from which withholding tax was not deducted - you should attach a separate schedule to your tax return showing details of those dividends. We will work out the amount of withholding tax you have to pay on these dividends and advise you of this amount. Note, however, that if the dividend is paid to you under a demerger that happened on or after 1 July 2002 and the head entity has not elected that it be assessable, you do not include it on your tax return even though it is an unfranked dividend and no withholding tax has been paid on that dividend. If you are in any doubt, please contact us.

    Deductions

    You cannot claim any expenses incurred in deriving dividends which are not assessable in Australia, including any dividend which you do not need to show on your Australian tax return.

    Last modified: 05 Mar 2020QC 27610