A company in which you hold shares may offer you the option of reinvesting your dividends to acquire more shares, instead of it being paid or credited to you.
If you reinvest your dividend, for tax purposes you treat the transaction as though you had received the dividend payment and then used it to buy more shares.
This means:
- you must declare the dividend as income in your tax return
- the additional shares are subject to capital gains tax (CGT)
- the acquisition cost of the additional shares is the amount of the dividends used to acquire them.
Example: dividend reinvestment plans
Natalie owns 1,440 shares in a company.
In November 2023, the company declared a dividend of 25 cents per share. Natalie was offered the choice of:
- taking the dividend as a cash payment of $360 (1,440 × 25 cents)
- reinvesting the dividend to acquire 45 more shares at $8 per share ($360 ÷ $8).
Natalie decided to participate in the dividend reinvestment plan and received 45 new shares on 20 December 2023.
Natalie must treat the transaction as though she received the dividend in cash and used it to buy more shares. This means:
- she must declare the $360 dividend as assessable dividend income in her 2023–24 income tax return
- for CGT purposes, she acquired the 45 new shares for $360 on 20 December 2023.