How are Dividends Taxed for Australian Expats: Franked vs Unfranked Explained

If you're an Australian Expat earning income from shares, you may have asked yourself, how are dividends taxed for Australian Expats? With Australia’s unique franking credit system, combined with changing tax obligations when you move overseas, means the answer isn’t always straightforward.

Dividends can be a valuable income stream, but the type of dividend, whether franked or unfranked, plays a key role in how much tax you’ll pay, both in Australia and potentially in your country of residence.

Understanding how these dividends are treated under Australian tax law is essential for managing your finances effectively while living abroad. In this blog, we’ll explain how franking credits work and explore how dividends are taxed for Australian expats living overseas.

What Are Franking Credits in Australia?

In Australia, companies pay tax on their profits before distributing dividends to shareholders. To avoid double taxation, the Australian Tax Office (ATO) allows companies to attach franking credits to dividends. These credits reflect the tax already paid by the company and can be used by shareholders to offset their own tax liability.

For example, if a company pays a dividend of $70 and includes a franking credit of $30, the total "grossed-up" dividend is considered to be $100. Australian tax residents may use that $30 credit to reduce the amount of tax they owe or, in some cases, receive a refund if their personal tax rate is lower than the corporate rate of 30%. But what happens when you're no longer a resident for tax purposes?

How Are Dividends Taxed for Australian Expats?

Once you become a non-resident for Australian tax purposes, the way you’re taxed on dividends changes significantly. How are dividends taxed for Australian expats depends largely on whether the dividends are franked or unfranked.

If you hold shares in Australian companies while living overseas, you can still receive dividends, but you will no longer benefit from franking credits in the same way you did as a resident. Instead, the Australian government imposes a withholding tax on dividends paid to non-residents.

Franked Dividends for Expats

If you receive a franked dividend as an Australian expat, the good news is that no Australian withholding tax applies. That’s because the company has already paid tax on that income, and the dividend is effectively considered “tax paid.”

However, you won’t be able to claim the franking credits on your tax return as a non-resident for tax purposes. While that means you can’t use the credits to reduce your own tax bill, the good news is that franked dividends are generally not taxed again in Australia for expats.

In summary, franked dividends are generally tax-free in Australia for expats, but you do lose access to the franking credits.

Unfranked Dividends for Expats

Unfranked dividends, on the other hand, are not covered by franking credits, meaning the company hasn’t paid tax on that portion of income before distributing it.

If you’re an Australian expat, these dividends are subject to a withholding tax of up to 30%, although this rate can be reduced under certain tax treaties between Australia and your country of residence.

So when asking how are dividends taxed for Australian expats, unfranked dividends often represent a less favourable tax outcome due to the immediate withholding tax that applies.

Consider Your Country of Residence

It’s important to remember that while Australia taxes non-residents on certain types of income, such as unfranked dividends, your country of residence may also have its own tax rules.

Some countries tax foreign dividend income, while others may offer exemptions or credits for foreign tax already paid. Double Tax Agreements (DTAs) between Australia and many countries help prevent double taxation, but the specifics vary. If you're unsure, it's always wise to seek advice from a cross-border tax specialist.

Structuring Investments as an Expat

Knowing how are dividends taxed for Australian Expats can help you decide how to structure your investments. For some, investing in companies that issue franked dividends may be more tax-efficient, as those payments often avoid additional Australian tax. For others, holding investments in international shares, or through their Australian superannuation fund, may provide better outcomes.

Make sure your investment strategy aligns with both your tax residency and long-term goals.

Conclusion

How are dividends taxed for Australian expats? It comes down to understanding the type of dividend you're receiving and your residency status. Franked dividends are typically exempt from Australian withholding tax but offer no benefit through franking credits. Unfranked dividends, however, are subject to withholding tax and may attract further tax depending on your country of residence.

Tax laws can change, and everyone's situation is different, so it’s always best to get personalised advice to ensure you're not paying more tax than necessary.

Runway Wealth Management is the trusted Financial Adviser to the Australian Expat community. Our tailored advice is backed by expertise, education and experience, which allows us to be at the forefront of Australian Expat Financial Planning.

If you would like to speak to one of our Expat Financial Advisers about this blog or if you have other queries, we would be more than happy to speak with you. Feel free to send us an enquiry through the ‘Contact Us’ tab provided in the link below:

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General Advice Disclaimer: The information contained herein is of a general nature only and does not constitute personal advice. You should not act on any recommendation without considering your personal needs, circumstances, and objectives. We recommend you obtain professional financial advice specific to your circumstances.