Dividend reinvestment plan
An arrangement where dividends automatically buy more shares instead of being paid as cash.
A DRP converts each dividend into additional shares, often at a small discount to market price and usually without brokerage. It is a simple way to compound a holding without having to act each time.
The tax treatment is unchanged. You declare the full dividend and any franking credits exactly as if you had received cash, even though no money reached your bank account.
That creates a practical problem: tax is payable on income you never saw. Investors with large DRP holdings sometimes face a bill with no corresponding cash to pay it.
Tax on money you never received
A $2,000 dividend is fully reinvested into new shares. You still declare $2,000 plus franking credits, and if tax is owed on it, the cash has to come from somewhere else.
The bit people get wrong
Every DRP allocation is a separate parcel with its own cost base and its own twelve-month CGT clock. After a decade of quarterly reinvestment you may have forty parcels to track when you eventually sell.
Common questions
Is a DRP a good idea?
For long-term accumulation it is efficient and disciplined, particularly with a discount and no brokerage. It suits investors who do not need the income and are prepared to keep records.
How do I work out capital gains later?
Each allocation needs its own record of date and price. Most registries provide a history, and portfolio software can track parcels automatically.
Can I turn it off?
Yes, at any time through the share registry. Many investors switch off DRPs as they approach retirement and start wanting the income as cash.