Passive income is money you earn from assets you own, without ongoing active work. For Australians, the most reliable and tax-effective sources of passive income come from investment portfolios — shares, ETFs, property trusts, and bonds — rather than side businesses or online ventures.
What Counts as Passive Income in Australia?
The ATO treats “passive income” differently for tax purposes — for general personal finance purposes, passive income means income generated with minimal ongoing effort:
- Dividends from shares and ETFs
- Distributions from REITs, infrastructure funds, and managed funds
- Interest from bonds, term deposits, and savings accounts
- Rental income from investment properties (though managing property is more active than often assumed)
- Franking credit refunds from the Australian imputation system
Not passive (despite common claims): affiliate marketing, selling digital products, dropshipping, content creation — these all require significant ongoing time and effort to maintain.
The Best Passive Income Sources for Australians
1. Australian share ETFs (dividends + franking credits)
The most tax-effective passive income for most Australians:
| ETF | Yield | Franked? | Effective yield (super pension) |
|---|---|---|---|
| VAS (Vanguard Aus Shares) | ~4.5% | Fully | ~6.2% |
| VHY (Vanguard High Yield) | ~5.5% | Highly | ~7.5% |
| A200 (BetaShares ASX 200) | ~4.5% | Fully | ~6.2% |
Franking credits can be refunded as cash to investors in super pension phase or with low taxable income — significantly increasing effective yield.
2. Bond ETFs and term deposits (interest income)
Predictable, stable income — lower yield than shares, lower risk:
- Term deposits: ~4.5–5.0% for 12-month terms (2025–26 rates)
- VAF (bond ETF): ~4.0–4.5% distributions
- Best held inside super (lower tax rate on interest income)
3. Australian REITs (property income)
Exposure to commercial, industrial, and residential property income without direct property ownership:
- VAP: ~4.5–5.0% distributions, unfranked, monthly distributions
- Listed on the ASX — highly liquid, no property management required
- Distributions include rental income and sometimes tax-deferred components
4. Infrastructure ETFs (CPI-linked income)
- CORE (BetaShares): ~4.5% distributions from regulated infrastructure
- MICH (Magellan): Global listed infrastructure
- Inflation-linked revenues provide growing income over time
5. Rental property income
Direct rental property can generate passive income, but:
- Requires capital (typically 10–20% deposit + stamp duty)
- Ongoing management is required (tenant, maintenance, insurance)
- Negative gearing is common on Australian investment properties — meaning cashflow is often negative initially
- Returns come mainly from capital growth rather than rental yield
Rental property is better described as “eventually passive” rather than immediately passive.
How Much Passive Income Can You Generate?
| Portfolio size | At 5% blended yield | In super pension (6% effective) |
|---|---|---|
| $100,000 | $5,000/year | $6,000/year |
| $250,000 | $12,500/year | $15,000/year |
| $500,000 | $25,000/year | $30,000/year |
| $1,000,000 | $50,000/year | $60,000/year |
| $2,000,000 | $100,000/year | $120,000/year |
Passive Income Tax in Australia
Passive income from investments is taxable in Australia:
- Dividends: Taxed as income; franking credits offset tax payable
- Interest: Taxed as income at marginal rate
- REIT distributions: Taxed as income; may include tax-deferred portions
- Rental income: Taxed as income; expenses deductible
To minimise tax, structure passive income through:
- Super pension phase: 0% tax — most efficient
- Spouse splitting and low-income partner accounts: Income in a lower-tax bracket
- Franking credits: Reduce or eliminate tax on Australian dividends
Building Passive Income Step by Step
Step 1: Open an investment account (brokerage for ETFs; super account for tax-advantaged investing)
Step 2: Start with a simple core ETF (e.g., VAS for Australian shares)
Step 3: Add a defensive component (term deposit or bond ETF)
Step 4: Reinvest distributions during accumulation (DRP or manual reinvestment)
Step 5: Add diversification over time (REITs, infrastructure, international)
Step 6: Review annually; rebalance by directing new contributions to underweight assets
Step 7: When ready to draw income, switch off DRP and receive cash distributions
Related Articles
- Building a Passive Income Portfolio Australia
- Living Off Dividends Australia
- Dividend Investing Australia
- Franking Credits Australia
- Income Investing hub
Frequently Asked Questions
What is the best passive income investment in Australia? For most Australians, broad Australian share ETFs (VAS, A200) provide the best combination of yield, tax efficiency (franking), liquidity, and inflation protection. For those in super pension phase, the combination of 0% tax and full franking credit refunds makes Australian shares exceptionally efficient. General information only — the best investment depends on your circumstances.
Is passive income taxed in Australia? Yes — investment income (dividends, interest, distributions) is taxable in Australia. Dividends with franking credits carry a tax offset that reduces the amount payable. In super pension phase, investment income is tax-free. Speak with an accountant to understand the tax implications of your specific passive income sources.
How much passive income is tax-free in Australia? In super pension phase (over 60), all investment income from a pension account is tax-free. Outside super, the tax-free threshold is $18,200 — below this level, you pay no income tax. Franking credits can result in tax refunds even at zero income if the credits exceed any tax liability.
This article provides general financial information only. For advice tailored to your situation, speak with a licensed financial adviser through the ASIC financial advisers register or MoneySmart.