Dividends, franking credits and crypto income

Alongside capital gains, investing throws off income while you hold an asset, and that income is taxed in the year you receive it rather than under the capital gains rules. For shares that means dividends and the franking credits attached to them. For crypto it means staking rewards, airdrops and similar rewards. This chapter covers both, and the franking system in particular, because it is where a lot of the value in Australian dividends actually sits.

Dividends are income the year you get them

A dividend is assessable income in the year it is paid or credited to you, and you declare it whether you took the cash or reinvested it. Capital gains tax does not apply to a dividend; it is ordinary income, taxed at your marginal rate. That holds even when the money never really passes through your hands, which is exactly what happens with a reinvestment plan.

Franking credits and the gross-up

Australian company profits are taxed once, in the company, and the imputation system passes the benefit of that tax on to you so it is not taxed twice. When a company has already paid tax on the profit behind a dividend, it attaches a franking credit to the payment. On your return you include two things: the dividend itself, and the franking credit on top, which together are the grossed-up amount. You are then given a tax offset equal to that franking credit. In effect you are taxed on the pre-tax profit and handed back the company tax already paid, so the dividend ends up taxed at your rate rather than the company's.

For an individual, franking credits are refundable. If your credits come to more than the tax you owe once your income and Medicare levy are accounted for, the excess is refunded to you. Unfranked dividends carry no credit, and where a company does not have your tax file number, tax may be withheld from an unfranked dividend and added to the amount you declare.

The holding rules on credits

There are integrity rules that decide whether you can use franking credits, aimed at people who hold a share only fleetingly around a dividend. The main one is the holding period rule: you generally need to hold the shares at risk for at least 45 days, or 90 days for certain preference shares, not counting the days you buy and sell. A small-shareholder concession takes most everyday investors out of this: if your total franking credits for the year are below $5,000 the holding period rule does not apply to you. Above that level it does, and failing it on a parcel can cost you the credits on that whole parcel, so it is worth knowing where you sit.

Dividend reinvestment plans

A reinvestment plan is treated as if you received the dividend and then used it to buy more shares, which has two consequences. First, you still declare the dividend as income, even though no cash arrived. Second, the new shares are a fresh parcel for capital gains tax, and their cost base is the dividend amount that bought them, with their own acquisition date. It is easy to forget the income side of a reinvestment plan precisely because there was no payment to notice, so the dividend statement is the record to keep.

Crypto income

Crypto can produce income as well as capital gains, and the income is taxed when you receive it, at its value in Australian dollars at that time. Staking rewards are income. So is the value of an established token you receive in an airdrop, and the periodic rewards or yield paid by a lending or DeFi arrangement, which the ATO treats much like interest. Being paid in crypto for work is income too. In each case the value you counted as income also becomes the cost base of those tokens, so when you later dispose of them you only pay capital gains tax on the growth from that point, not on the whole amount again.

There is a narrow exception worth naming. The very first distribution of a brand new project's tokens, before there is any market for them, is not treated as income on receipt, and neither is a coin you receive from a chain split. These start with a nil cost base, and tax only comes into it as a capital gain when you eventually dispose of them.

The bottom line

Declare dividends in the year they are paid, include the franking credit in the grossed-up amount and claim the offset, and remember the credit can be refunded if it exceeds your tax. Watch the holding rules only if your credits pass the small-shareholder level. Treat staking, airdrops of established tokens and DeFi rewards as income at their value on the day, and carry that value forward as the cost base for later. Keep every statement, because the income side is the part that hides in plain sight.

General information only, not tax or financial advice. Check the ATO or a registered tax agent for your situation. For the mechanics of franking, see franking credits explained.