If you’re the new director of a company or thinking about jumping into a new business venture, you’re likely learning about a whole variety of new policies, structures, information and terms, one of which is likely dividends.
So, what are dividends, anyway? And how do they work?
First up, dividends are payments made by a company to its shareholders, usually as a distribution of profits made. In Australia, dividends have specific regulatory and tax considerations, and can be used in different ways. If this is something you're navigating at the moment, here are a few things to take note of when it comes to dividends and how they work.
1. There are two main types of dividends:
- Interim Dividends
- Final Dividends
Interim dividends are paid during the financial year based on interim profits, while final dividends are declared at the end of the financial year after the company’s financial statements are finalised.
2. Payment and declaration
Dividends are declared by the company's board of directors and approved by shareholders at an Annual General Meeting (AGM). Once approved, they’re paid to shareholders usually within a few weeks.
3. Imputation System
Australia has a unique dividend imputation system, also known as franking credits. This system aims to eliminate double taxation of company profits by allowing shareholders to claim a credit for the tax the company has already paid on its profits. This makes dividends more tax-efficient.
4. Taxation
The tax treatment of dividends depends on whether they are fully franked (where the company has already paid tax on the profits), partially franked, or unfranked (no tax has been paid). If dividends are ‘franked’, that means the company has paid tax on the profits already and shareholders don't have to pay tax again on the same money. Whereas when dividends are ‘unfranked’, that means the company hasn't paid tax on that money yet.
5. Dividend Reinvestment Plans (DRPs)
Many Australian companies offer DRPs, allowing shareholders to reinvest their dividends back into additional shares instead of receiving cash. This can be a way for shareholders to increase their holdings without incurring stock brokerage fees.
6. Dividend Yield
This refers to the dividend paid out as a percentage of the share price. Investors often consider dividend yield as part of their investment strategy, especially those seeking income from their investments. For example, investors can use dividend yield – the value of a dividend relative to the share price – to compare their return on investment.
7. Dividend Policy
Each company decides on its dividend policy, considering factors such as profitability, cash flow, investment opportunities, and shareholder expectations.
Overall, dividends in Australia play an important role in investor returns, and the imputation system makes them a significant part of the taxation framework for individual shareholders. Have a question about dividends? Let us know in the comments section.
For specific information relating to your personal circumstances, please consult your accountant or financial planner. You can book an appointment with accounting fellow and Crecera co-founder, Jacquie Hannan, here.
