How can you invest your money and produce additional income, yet pay little or no additional tax – and in some cases pay less tax?

It’s called dividend imputation and you get it by buying shares in selected Australian companies.

Before dividend imputation, tax on company earnings was paid twice, once by the company and then by the shareholder. Shareholders still pay personal tax on dividend income, but may also receive a tax credit for the company tax already paid. This is known as a franked dividend.

If you receive franked dividends your total tax bill may well be lower than with no dividend at all. The tax credit may cover both the tax due on your dividend and also some of the tax due on your other income. On higher incomes, taxpayers may pay some extra tax, but very much less than they would have paid on the same increase in other income.

Even investors who pay little other tax can benefit from franking credits they receive a cash rebate for any surplus credits from the Tax Office.

You can benefit from dividend imputation by direct ownership of Australian shares, by investing in a managed fund, or by contributing to a superannuation fund that invests in Australian shares. Franked dividends can reduce the tax on superannuation fund earnings well below the 15% maximum rate.

If you are interested in gaining additional income but do not want to increase your tax payments, Australian shares may be a smart investment.