Q&A4 Tax on Interest or Dividends
Answer – They are taxed is the same, it’s at your marginal rates (for individuals). What makes these two types of income streams different for tax purposes are:
Interest is paid on funds held in bank accounts or that were loaned to people/entities. Dividends are distributions to shareholders;
a) If any tax is withheld, it is prior to its distribution to you.
b) In most cases, Interest has no tax withheld from it prior to it being paid to you (an exception to this is where you have not quoted your TFN to the bank or are a foreign resident).
Dividends are made up of Franked and Unfranked components. Franked Dividends have had 30% tax taken out already when they are paid to you. You can claim the tax taken out already in Franked Dividends as a credit, which helps reduce your overall tax payable / refundable for an income tax year. Unfranked dividends, are like interest and have no tax withheld from it prior to it being paid to you (an exception to this is where you have not quoted your TFN to the bank or are a foreign resident).
c) How they are treated when bank accounts are closed versus selling your shareholding.
When you close a Bank Account or are repaid a loan that was earning interest, these are cash payments and the type of assets are all cash. The are no Capital Gain Tax Implications on Cash Assets.
On the other hand, any profit between the sale price and the purchase price of shares sold are subject to Capital Gains Tax. If you have owned the shares for more than 12 months, current law allows you to half that capital gain (for individuals).
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