Investment income — dividends, bank interest, rental income, and trust distributions — is assessable income in Australia. It is added to your other income and taxed at your marginal rate. The exception is that franking credits attached to Australian company dividends can reduce or eliminate the tax you pay on that income, and rental property expenses can create a deductible loss.
Tax on Dividends
Australian company dividends are taxed as ordinary income, but the dividend imputation (franking) system prevents double taxation. When an Australian company pays a dividend from already-taxed profits, it attaches a franking credit — a credit for the corporate tax (25% or 30%) already paid.
How franking credits work:
If you receive a $700 franked dividend with a $300 franking credit (30% corporate tax rate):
- Grossed-up dividend: $1,000
- Tax at 32.5% (example marginal rate): $325
- Less: franking credit: −$300
- Net tax on the dividend: $25
For low-income earners, if the franking credit exceeds their tax liability, the excess credit is refunded in cash — this is why some retirees receive tax refunds larger than the tax they paid.
Dividends from overseas companies generally do not carry franking credits and are taxed at full marginal rates. A foreign income tax offset may apply if tax was withheld overseas.
See Franking Credits Explained for detailed examples.
Tax on Bank Interest
Interest income from savings accounts, term deposits, and other deposit accounts is assessable income in the year it is credited (not necessarily when it matures for term deposits — the ATO treats interest as derived progressively unless the contract specifies otherwise).
There is no offset or concession for interest income — it is taxed at your full marginal rate.
Banks report interest paid to the ATO, and this information pre-fills into your myTax return. Always check the pre-filled amounts match your bank statements.
Common mistake: People forget to declare interest on accounts they rarely look at — joint accounts, children’s accounts held by parents, or foreign bank accounts. All interest must be declared.
Tax on Rental Income
Rental income from an investment property is assessable income in the year it is received. However, a wide range of expenses are deductible, including:
- Mortgage interest (the interest component only, not repayments of principal)
- Property management fees and letting fees
- Council rates, land tax, water charges
- Insurance premiums
- Repairs and maintenance (not capital improvements)
- Depreciation on the building (2.5%/year) and plant and equipment
- Travel expenses to inspect the property (severely restricted since 2017)
If your deductible expenses exceed your rental income, the net rental loss can be offset against your other income (wages, etc.) — this is negative gearing. The loss reduces your taxable income, providing a tax benefit.
See Negative Gearing Explained for full detail.
Tax on Trust Distributions
If you are a beneficiary of a family trust or unit trust (including managed funds), you receive trust distributions that may include:
- Australian sourced income (taxed at marginal rates)
- Capital gains (the 50% discount may apply if the trust held the asset 12+ months)
- Franked dividends (with franking credits)
- Foreign income (foreign tax offsets may apply)
Each component is taxed according to its own rules. The trust’s annual tax statement breaks down the components so you can report them correctly.
Reporting Investment Income on Your Tax Return
The ATO pre-fills much of this information via its data-matching programs:
- Dividends and franking credits — from dividend statements and ASX reporting
- Bank interest — from financial institution reporting
- Managed fund distributions — from annual tax statements
Important: Always check pre-fill for completeness and accuracy. Not all data sources report on time, and offshore income will not be pre-filled. You are responsible for declaring all income whether or not the ATO has pre-filled it.
Frequently Asked Questions
Do I pay tax on dividends from Australian shares? Yes — but franking credits reduce the tax you owe. The dividend is included in your assessable income at the grossed-up amount (cash dividend plus franking credit), and the credit is then applied against your tax. For many investors, the effective tax rate on fully franked dividends is substantially lower than their marginal rate.
How much tax do I pay on savings account interest? At your full marginal rate. Interest is assessable income with no concessions. At a 32.5% marginal rate, each $100 of interest costs $32.50 in tax (plus 2% Medicare levy = $34.50).
Can I reduce tax on my rental income? Yes — through allowable deductions. The interest on your investment loan, property management fees, rates, insurance, repairs, and depreciation all reduce your net rental income. If deductions exceed income, the net loss may be deducted from your other income.
Do I pay tax on distributions from an index fund ETF? Yes. ETF distributions include income components (dividends, interest) taxed as income, and potentially a capital gains component. The annual tax statement from your ETF manager shows each component. See Tax on ETF Investments.
This article provides general tax information. For advice tailored to your situation, speak with a registered tax agent or accountant. Find one through the Tax Practitioners Board register.