How does a company pay dividends and distribution?
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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If you own shares in a company, you may receive a dividend or distribution.
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 or distribution statement should contain details of the date a payment was made to you, which is 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 new shares acquired through the dividend reinvestment scheme (at the time of reinvestment) to help you work out any potential capital gains or capital losses on the eventual disposal of the shares.
If you are paid or credited taxable bonus shares, the company issuing the shares should provide you with a dividend statement or distribution 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 are 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 CGT even if they are not taxed as a dividend. For more information, see Guide to capital gains tax 2021.
Amounts treated as dividends
The rules in Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936) prevent private companies from making tax-free distributions 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 they exceed the company’s distributable surplus. 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 are assessable dividends paid to you.
Dividends paid to you under a demerger 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.
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 franking company
Under the Trans-Tasman imputation system, a New Zealand franking 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 franking 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, see Trans-Tasman imputation special rules.
Last modified: 27 May 2021QC 64914