• How does a company pay out its profits?

    Dividends

    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 own shares in a company, you will generally be paid your share of the company's profits as a dividend.

    In any income year you may receive both an interim and a final dividend. In most circumstances, you will be liable to pay income tax for that income year on the dividends you are paid or credited.

    You must include in your assessable income dividends paid or credited to you. 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. It is this date that will determine in which income year you include the dividend in your assessable income. Where the dividend is paid by cheque, it is deemed to have been paid to you on the date the cheque was posted to you by the company - 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 directly deposited into 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. Keep a record of the market value of the reinvested dividend (at the time of reinvestment) to help you work out any potential capital gains or capital losses on the eventual disposal of the shares.

    Bonus shares

    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. A company should also have informed you if it issued tax-free bonus shares out of a share premium account.

    From 1 July 1998, bonus shares will be taxed as a dividend if the shareholder has a choice between receiving a dividend or the shares, unless they are issued in certain circumstances by a listed public company which does not credit its share capital account. If you make a capital gain when you dispose of bonus shares that you received on or after 20 September 1985, you may have to pay capital gains tax even if they are not taxed as a dividend. For more information, see the Guide to capital gains tax 2007 (NAT 4151-6.2007).

    Amounts treated as 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, see Amounts treated as dividends and Transactions that will be treated as dividends and Amounts that will not be treated as dividends.

    Attention

    Non-commercial loans and private companies

    The Government announced (Press Release No. 089 by the Minister for Revenue and Assistant Treasurer, dated 6 December 2006) amendments to the integrity rules which apply to distributions by private companies (Division 7A of the Income Tax Assessment Act 1936).

    These rules prevent private companies from making tax-free distributions of profits to shareholders (or their associates). Unless they come within specified exclusions, advances, loans and other credits to shareholders (or their associates) are treated as assessable dividends to the extent that there are realised or unrealised profits in the company. When an amount is treated as a dividend under Division 7A, the private company's franking account is debited and the dividend is taxable in the hands of the shareholder or associate, without access to a franking credit to offset the tax paid by the company.

    The Government will reduce the double-penalty nature of Division 7A by removing the automatic debiting of the company's franking account when an amount is treated as a dividend.

    The Commissioner of Taxation will have the discretion to not treat an amount as a dividend where a taxpayer has attempted to comply with Division 7A but made an honest mistake.

    A range of other technical amendments will also be made to the rules to provide more flexibility for taxpayers.

    Changes to the fringe benefits tax (FBT) laws will simplify their interaction with Division 7A.

    Section 108 of the Income Tax Assessment Act 1936 (the precursor to Division 7A) will also be repealed as it is a duplicate provision that is no longer necessary.

    The changes are expected to generally have effect from 1 July 2006. However, the discretion will apply from 1 July 2002 and the FBT amendments from 1 April 2007.

    At the time of printing, these changes had not become law.

    End of attention

    Demerger dividends

    Dividends paid to you under a demerger that happened on or after 1 July 2002 are generally not included in your assessable income. This concession will apply automatically to eligible demergers unless the head entity elects that the dividend should be assessable for all shareholders. Where that election is made, you should include the dividend on your tax return as an unfranked dividend.

    Generally the head entity undertaking the demerger will advise you whether a demerger dividend has been paid and whether it has elected that the dividend be assessable. In addition, we may have provided advice in the form of a Class Ruling specific to the demerger which may have been supplied with the head entity's advice. If you are in any doubt contact us.

    Non-share dividends

    Distributions from a non-share equity interest that do not constitute a non-share capital return are called non-share dividends.

    Franked dividends from a New Zealand company

    From 1 October 2003, a New Zealand company that has elected to join the Australian imputation system may pay a dividend franked with Australian franking credits. Australian shareholders of a New Zealand company that has made such an election may be entitled to claim the benefits of the franking credits attached to the dividends. For more information, including information on how these dividends are taxed, visit the business section of our website and click on 'Trans-Tasman imputation'.

    Last modified: 28 Jun 2007QC 27900