Whether inside or outside superannuation dividend income is superior to all other income from a taxpayers point of view.  Dividends distributed from direct shareholding or from an investment in managed funds with a 100% portfolio of Australian shares quite simply are taxed at a lower rate than other forms of income.

Apart from the fact that dividend yield is in some cases as high as bank interest dividend income is far more tax effective than interest because of the imputation credits attaching to them.

Imputation credits tend to be misunderstood. They were introduced when Paul Keating was Treasurer to correct what was perceived as, and was, double taxation.

A “fully franked dividend” paid in Australia is only totally tax free for taxpayers with a marginal tax rate less than the company rate (30%). That is not many taxpayers because the huge majority of Australians have a marginal tax rate of 31.5%.

A fully franked dividend of say $700 is added to one’s taxable income together with the imputation credit ( i.e the tax paid by the company on the profit that it earned to enable it to pay a $700 dividend) of $300. The shareholder pays tax, at his marginal rate, on the $700 AND THE $300…… but that tax is REDUCED by crediting the $300 previously paid by the company.

Some years ago the rules were changed so that sometimes this tax can actually be paid back to shareholders on low incomes, in which case dividends become not only tax free but they are actually increased by a refund of excess imputation credits. This leaves bank interest for dead.