Investment Income
Dividends, franking credits, and how investment income is taxed
Franking Credits
How dividend imputation reduces your tax
How Franking Credits Work
When an Australian company pays tax on its profits (30%), it can pass that tax credit to shareholders as a franking credit. You include the grossed-up dividend in your income, then get the credit back as a tax offset.
Example
Receive a $700 fully franked dividend. Gross up: $700 + $300 franking credit = $1,000 income. Pay tax on $1,000, but get $300 credit back.
Franking Credit Refunds
If your franking credits exceed your total tax liability, you get the excess refunded. This is common for low-income earners, retirees, and those in the tax-free threshold.
Example
Total tax bill is $0 (under $18,200 income) but you received $500 in franking credits — you get $500 as a cash refund.
Unfranked Dividends
Some dividends are partially or fully unfranked — the company hasn't paid tax on that portion. You still declare the income but don't get a credit for the unfranked part.
Example
Receive a $1,000 dividend that's 50% franked. You get a $214 franking credit on the franked half, but the unfranked $500 is taxed at your full rate.
Negative Gearing
When your investment costs more than it earns
How Negative Gearing Works
When your investment property expenses (loan interest, rates, maintenance) exceed the rental income, the loss reduces your taxable income from other sources like your salary.
Example
Rent = $25,000/year, expenses = $35,000/year. Loss of $10,000 reduces your $90,000 salary to $80,000 taxable income.
Positive Gearing
When rental income exceeds expenses, the net profit is added to your taxable income. You pay tax on the profit at your marginal rate.
Example
Rent = $30,000/year, expenses = $22,000/year. The $8,000 profit is added to your salary for tax.