Understanding Shareholdings in Australian Companies

The Basics of Shareholdings in Australia

Shareholdings represent ownership in a company, with shareholders entitled to a portion of the company’s profits and a say in its governance, proportional to the number of shares they own. Australian companies issue shares as a means of raising capital, and these shares come with various rights and obligations. The two primary types of shares are ordinary shares and preference shares, each offering different rights concerning dividends, voting, and capital on winding up.

Declaring Dividends in Australia

Dividends are the portion of a company’s profits distributed to shareholders, serving as a reward for their investment. The declaration of dividends in Australia is subject to the company’s constitution and the directors’ discretion, who must ensure the company passes the solvency test before making such distributions. The solvency test confirms that the company can pay its debts as they fall due and that its assets exceed its liabilities.

Types of Dividends

• Interim Dividends: Declared and paid before a company’s year end and the finalisation of its full-year financial statements.
• Final Dividends: Declared following the end of the financial year and after reviewing the company’s final profit figures.

Taxation of Dividends

The taxation of dividends in Australia operates under the imputation system, designed to prevent the double taxation of dividends—once at the corporate level and again at the shareholder level. Under this system, companies can attach franking credits to dividends, representing the tax the company has already paid on its profits. Shareholders can then use these credits to offset their own tax liabilities.

Franking Credits

Franking credits are a cornerstone of the Australian dividend taxation system. When a shareholder receives a dividend with franking credits, they must include both the dividend and the credits in their taxable income. However, these credits can be used to reduce the income tax payable, potentially leading to a refund if the credits exceed the tax owed.

Basic Taxation Issues for Shareholders

Shareholders must navigate several taxation issues related to their investments:

• Capital Gains Tax (CGT): When selling shares, shareholders may make a capital gain or loss, subject to CGT. The length of time shares are held can affect the CGT calculation, with a discount available for assets held for more than 12 months.
• Dividend Income: Shareholders must report dividends as income on their tax returns, including the grossed-up value of dividends (dividend amount plus franking credits).
• Franking Credits: Shareholders can use franking credits to reduce their tax liability, with excess credits often refundable.

Where to Now

For shareholders and companies alike in Australia, understanding the mechanics of shareholdings, dividends, and associated taxation issues is fundamental. By grasping these concepts, directors and shareholders can make informed decisions, optimising their business development strategies in alignment with their financial goals and tax obligations.

As always, it’s advisable to consult with a financial advisor or tax professional to navigate the complexities of shareholdings and taxation effectively.