A Dividend Reinvestment Plan (DRP) allows shareholders to receive additional shares instead of cash dividends. Rather than receiving your dividend as a cash payment, the company issues new shares at a slight discount to market price. DRPs are a simple, brokerage-free way to compound your investment — but they have important tax implications that all Australian investors should understand.
How a DRP Works
- The company declares a dividend and announces the DRP terms
- Shareholders who have enrolled in the DRP receive new shares instead of cash
- The number of shares issued is calculated by dividing the dividend entitlement by the DRP price
- Fractional entitlements are typically paid as cash
Example:
- You hold 500 shares in Wesfarmers (WES)
- Dividend declared: $0.88 per share → your entitlement is $440
- DRP price: $70.40 per share (e.g., 2% discount to market price of $71.84)
- New shares issued: $440 ÷ $70.40 = 6 new shares (plus fractional cash)
- You now hold 506 shares
Each dividend cycle, you hold more shares — which in turn generate more dividends — compounding over time.
DRP Discount
Many companies offer a small discount (typically 1–3%) on DRP shares to incentivise participation. This gives you the shares at slightly below market price, which is an immediate paper gain.
Not all companies offer a discount — some issue DRP shares at the current market price with no discount. Check the specific DRP terms in the company’s DRP plan document (available on the share registry’s website or asx.com.au).
Tax Treatment of DRP Shares
The most important thing to understand: a DRP dividend is still a taxable event in the year it occurs — even though you receive shares rather than cash.
What you must declare in your tax return:
- The grossed-up dividend (cash equivalent + franking credits) as assessable income
- The franking credit as a tax offset (the same as if you had received cash)
Cost base of DRP shares: The cost base of each parcel of DRP shares is the market value at which they were issued (the DRP price). This is important for capital gains tax when you eventually sell. Keep records of:
- The DRP date
- The number of shares received
- The DRP price per share (= cost base per share)
Poor record-keeping of DRP cost bases is one of the most common tax issues for long-term Australian share investors.
No Brokerage on DRP Shares
Shares received under a DRP are issued directly by the company (through the share registry) — no brokerage fees apply. This makes DRPs particularly beneficial for small investors who are reinvesting small dividend amounts where a brokerage fee would otherwise consume a significant portion of the reinvestment.
When a DRP Makes Sense
| Situation | DRP benefits |
|---|---|
| Accumulation phase (long-term building wealth) | ✅ Automatic compounding, no brokerage |
| Regular income not required | ✅ No need for cash from dividends |
| Small dividend amounts | ✅ Avoids brokerage on small reinvestments |
| Building a position in a company you want to hold long-term | ✅ Gradual cost averaging |
| Retirement / income phase | ❌ You need cash income — taking cash dividends makes more sense |
| You want to diversify into different assets with dividends | ❌ DRP locks reinvestment into the same company |
How to Enrol in a DRP
DRP enrolment is managed through the company’s share registry — not your broker. Major Australian share registries:
- Computershare — computershare.com.au
- Link Market Services — linkmarketservices.com.au
- Boardroom — boardroomlimited.com.au
Log in with your Shareholder Reference Number (SRN) or Holder Identification Number (HIN — for CHESS-sponsored shares). You can typically elect and deselect DRP participation at any time before the ex-dividend date.
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- Growth vs Dividend Shares
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Frequently Asked Questions
Is a DRP better than taking cash dividends and reinvesting manually? A DRP is simpler and avoids brokerage. Manual reinvestment gives you flexibility — you can redirect dividends to different investments (other shares, ETFs, paying down debt). For a company you want to hold and compound for many years, a DRP is usually the simpler and cheaper option. For investors who want control over reinvestment allocation, manual reinvestment is preferable.
Do I need to pay tax on DRP shares in the year they are issued? Yes. A DRP dividend is a taxable dividend event in the year it occurs. Even though you received shares rather than cash, you must include the grossed-up dividend amount (cash equivalent + franking credits) as assessable income, and claim the franking credit offset. The ATO considers the DRP shares as you having received the cash dividend and then used it to purchase shares — it is taxed accordingly.
What happens if there are not enough shares to cover my full dividend entitlement? If your dividend entitlement does not divide evenly into whole shares, the fractional amount is paid to you as cash. Some companies round down and pay the fraction as cash; others use slightly different methods — check your company’s DRP terms.
This article provides general financial information only. For advice tailored to your situation, speak with a licensed financial adviser. You can find one through the ASIC financial advisers register or MoneySmart.