Dividends, Capital Gains, and Managed Fund Distributions
Earning income from investments is one of the most effective ways to build long-term wealth. Whether you invest in shares, property, or managed funds, it’s important to understand how your investment income is taxed in Australia. Many investors focus on returns, but overlooking the tax implications can lead to unexpected bills or missed opportunities for savings.
In this blog, we’ll explore how dividends, capital gains, and managed fund distributions are taxed, and what you can do to make smarter, tax-efficient investment decisions.
1. Tax on Dividends
When you invest in shares, you may receive dividends — payments from a company’s profits to its shareholders. In Australia, dividends are generally categorised as either franked or unfranked.
- Franked dividends include a franking credit, which represents the tax the company has already paid on its profits. This credit can reduce your overall tax liability or even result in a refund if your personal tax rate is lower than the company rate.
- Unfranked dividends, on the other hand, do not include a franking credit. You’ll need to pay tax on the full amount of the dividend at your marginal tax rate.
Understanding the difference between franked and unfranked dividends helps investors plan their portfolios more strategically. For example, retirees or lower-income investors may benefit from fully franked dividends, as franking credits can often result in a cash refund.
2. Tax on Capital Gains
A capital gain arises when you sell an investment for more than you paid for it. This applies to a wide range of assets, including shares, investment properties, and units in managed funds. The capital gains tax (CGT) is not a separate tax but forms part of your annual income tax return.
Here’s how it works:
- If you hold an asset for less than 12 months before selling it, the entire gain is added to your taxable income.
- If you hold the asset for more than 12 months, you may be eligible for a 50% CGT discount as an individual taxpayer. This means you only pay tax on half of the gain, significantly reducing your liability.
It’s essential to keep detailed records of all purchase and sale transactions, including brokerage fees and associated costs. These can be used to adjust your cost base and reduce your taxable gain.
For property investors, additional rules may apply, particularly around main residence exemptions, investment property deductions, and depreciation schedules.
3. Managed Fund Distributions
Managed funds offer a convenient way to diversify your investments, but they can also create complex tax reporting requirements. When you invest in a managed fund, your share of the fund’s income, such as dividends, interest, or capital gains, is distributed to you each year.
Even if you choose to reinvest your distributions, they are still considered taxable income in that financial year. Managed fund statements often break down distributions into different categories, each with distinct tax implications.
For example:
- Interest income is taxed at your marginal rate.
- Capital gains may be eligible for the 50% discount if the fund held the assets for more than 12 months.
- Foreign income may have foreign tax credits attached, which can offset your Australian tax.
Accurately reporting these details ensures compliance and may help you avoid overpaying tax.
4. How Certum Advisory Can Help
At Certum Advisory, we help clients turn tax compliance into a strategic advantage. Our team understands that smart investment management goes beyond choosing assets, it’s also about minimising tax and maximising after-tax returns.
We work with investors to:
- Review and optimise their investment structures.
- Ensure correct reporting of dividends, capital gains, and managed fund distributions.
- Identify opportunities for deductions, offsets, and strategic timing of asset sales.
With the right guidance, you can grow your portfolio confidently while keeping your tax obligations in check.
Final Thoughts
Tax on investment income can be complex, but understanding how it works is key to achieving long-term financial success. Whether you’re a seasoned investor or just starting your wealth-building journey, proactive planning makes all the difference.
Talk to Certum Advisory today to ensure your investment strategy is both compliant and tax-effective.
