A dividend reinvestment plan (DRP) lets you use your dividends to buy more shares in the same company instead of taking the cash. Many ASX-listed companies and listed investment companies offer one. It's a simple way to grow a holding over time, but it doesn't change how the dividend is taxed, and every reinvestment creates a new parcel of shares you'll need records for when you sell.
This guide explains how DRPs work, how the ATO taxes them, and what to keep track of, with a worked example.
How a dividend reinvestment plan works
When a company declares a dividend, shareholders who have joined its DRP don't receive the cash. The company (through its share registry) applies the dividend to new shares, usually priced at the average market price over a set number of trading days around the dividend date. Some plans apply a small discount to that price, and the board can change or remove the discount from one dividend to the next.
- Usually no brokerage: DRP shares are generally issued or bought for you without brokerage.
- Full or partial participation: many plans let you reinvest all of your dividends or only some, and take the rest as cash.
- Whole shares: plans differ on how they handle the leftover amount when the dividend doesn't buy an exact number of shares; check the plan rules.
- Opting in or out: you join, change or leave a DRP through the company's share registry, usually online. An election generally has to be made by the plan's cut-off date to apply to the next dividend.
A DRP is not the same as a bonus share plan. Under a bonus share plan you receive bonus shares instead of a dividend, and the tax treatment is different (for example, the cost base of your existing shares may be spread across the bonus shares). If a company offers both, read the plan booklet or any ATO class ruling for that plan before you choose.
Reinvested dividends are still taxable income
For tax purposes the ATO treats a DRP as if you received the dividend in cash and then used it to buy more shares. That means:
- You declare the full dividend in your tax return for the income year it's paid, even though no cash reached your bank account.
- If the dividend is franked, you also include the franking credit in your assessable income and claim it as a tax offset. Franked amounts go at label T and franking credits at label U of item 11 (Dividends); unfranked amounts go at label S.
- If your franking credits are more than the tax you owe, an individual can generally get the excess refunded.
- Dividend details are often pre-filled from share registry data, but always check them against your dividend statements.
Because the tax is payable without any cash coming in, a large reinvested dividend can leave you with a tax bill to fund from elsewhere. Our guide to how dividends are taxed in Australia and our explainer on franking credits cover the basics in more detail.
Each DRP allotment is a separate parcel for capital gains tax
Every time a dividend is reinvested you acquire a new parcel of shares, and each parcel is a separate CGT asset with its own:
- Cost base: the amount of the dividend applied to buy the shares. If the DRP price includes a discount, the cost base is still the amount you actually paid (the dividend applied), not the higher market value.
- Acquisition date: the date the new shares were issued or allotted to you, not the date you bought your original shares.
This matters when you sell. The 50% CGT discount for individuals only applies to shares you've owned for at least 12 months, and that test is applied parcel by parcel. If you sell your whole holding, the original shares may qualify for the discount while DRP shares allotted in the last 12 months don't. When you sell part of a holding you need to be able to identify which parcels you sold; many investors use first in, first out because it's the easiest to track, but you can identify specific parcels if your records support it.
From 1 July 2027 the CGT discount is replaced by cost-base indexation and a 30% minimum tax for gains made from that date, which applies to shares as well as property. Gains up to 30 June 2027 keep the discount rules. Accurate cost base and acquisition date records for every DRP parcel will matter even more under the new rules. See our guide to the CGT changes from 1 July 2027.
The 45-day holding period rule for franking credits
To claim franking credits you generally need to hold the shares "at risk" for at least 45 days (90 days for preference shares), not counting the day you acquire or dispose of them. Days on which you've hedged away more than 70% of the risk of owning the shares don't count.
- Small shareholder exemption: the holding period rule doesn't apply to an individual whose total franking credit entitlement for the year is under $5,000. That's roughly $11,667 of fully franked dividends from companies taxed at 30%. You still need to meet the related payments rule.
- Above the threshold: if your franking credits are $5,000 or more, the rule applies to all of them. It isn't a $5,000 cap you can claim up to.
- Recently acquired shares: if you sell part of a holding, for the holding period rule you're treated as having sold your most recently acquired shares first (last in, first out). That can include recent DRP allotments.
- Trusts and companies: the small shareholder exemption only applies to individuals, not to trustees, partnerships or companies.
Worked example
Mia holds 2,450 shares in an ASX-listed company. On 20 March 2026 it pays a fully franked final dividend of 50 cents a share, and she participates fully in the DRP. The company pays tax at 30%.
- Dividend: 2,450 × $0.50 = $1,225
- Franking credit: $1,225 × 30/70 = $525
- DRP price: average market price of $25.00 less a 2% discount = $24.50
- New shares: $1,225 ÷ $24.50 = 50 shares, allotted on 20 March 2026 (market value 50 × $25.00 = $1,250)
Her 2025–26 tax return
Mia declares $1,225 at label T and $525 at label U, so her assessable income rises by $1,750, even though she received no cash. Her taxable income is $90,000, so her marginal rate is 30% plus the 2% Medicare levy: 32% × $1,750 = $560 in tax, less the $525 franking offset, leaves $35 extra tax to pay.
If Mia's taxable income were under $45,000 instead, her rate would be 16% plus 2% Medicare levy: 18% × $1,750 = $315, so the $525 offset more than covers it and the excess $210 can be refunded. Her franking credits for the year are well under $5,000, so the small shareholder exemption means the 45-day rule doesn't affect her.
Her new parcel
The 50 DRP shares have a cost base of $1,225 ($24.50 each) and an acquisition date of 20 March 2026. The $25 difference between the market value and what she paid isn't separate income and isn't added to the cost base.
Selling on 10 February 2027
Mia sells all 2,500 shares at $28.00. Her original 2,450 shares cost $20.00 each in 2019. Ignoring brokerage and assuming no capital losses:
- Original parcel: 2,450 × ($28.00 − $20.00) = $19,600 gain, held more than 12 months, so the 50% discount applies: $9,800
- DRP parcel: 50 × ($28.00 − $24.50) = $175 gain, held less than 12 months, so no discount
- Net capital gain: $9,800 + $175 = $9,975, included in her 2026–27 tax return
If she sold after 1 July 2027, the part of each gain made from that date would be worked out under the new indexation rules instead.
Pros and cons of a DRP
- Pros: dividends are reinvested automatically, usually without brokerage, sometimes at a small discount, and the holding can grow over time as new shares earn their own dividends.
- Cons: you pay tax on dividends you never receive in cash, your portfolio can become concentrated in one company, you have no control over the price you buy at, and every dividend adds another parcel to track for CGT.
Whether a DRP suits you depends on your cash flow, tax position and investment goals. This article is general information, not financial advice; speak with a licensed financial adviser about whether to invest.
Records to keep
- Every DRP allotment statement: the date, number of shares, price and amount of dividend applied
- Every dividend statement showing franked and unfranked amounts and franking credits
- The purchase contract notes for your original shares, including brokerage
- Sale contract notes when you sell, and which parcels you sold
Keep these for at least five years after you sell the shares, which can mean decades for a long-held DRP holding. Share registry portfolio reports help, but check they show each parcel separately. See our guide to ATO record-keeping requirements.
Sources: ATO, Owning shares, ATO, TD 2000/3, ATO, Refund of franking credits for individuals, ATO, 11 Dividends 2026 and ATO, Capital gains tax reform.
Need a hand?
If you've been reinvesting dividends for years and aren't sure what your shares cost, we can rebuild your parcel records, work out the capital gain when you sell, and make sure your dividends and franking credits are reported correctly. Contact us or book an appointment.
How do I get help with this from the ATO?
The ATO provides guidance through ato.gov.au, the Small Business Support Line (13 28 66), and Online Services for individuals and businesses. For complex situations, a registered tax agent provides advice tailored to your specific circumstances and professional indemnity protection. You can verify agent registration at the TPB register at tpb.gov.au.
What records do I need to keep for tax purposes in Australia?
Most tax records must be kept for five years from the date of lodgement or the date the transaction occurred, whichever is later. Records must be in English or convertible to English and must be sufficient to explain the income and deductions in your return. The ATO can request records at any time during the retention period.
When do I need a registered tax agent in Australia?
Consider a registered tax agent when your affairs involve multiple income sources, business activity, investment properties, capital gains, or overseas income. Agents extend your lodgement deadline, provide safe harbour protection, and take professional responsibility for the advice given. Verify registration at tpb.gov.au.
How does the ATO calculate penalties for compliance failures?
The failure to lodge penalty is based on penalty units ($364 per unit from 1 July 2026), accruing per 28-day period for late returns and BAS lodgements. Incorrect information penalties range from 25% to 75% of the tax shortfall depending on whether the behaviour was careless, reckless, or intentional. Proactive disclosure before an audit begins typically results in significantly reduced penalties.
What is the difference between tax avoidance and tax minimisation?
Tax minimisation is the legal arrangement of your affairs to reduce tax — claiming all eligible deductions, using appropriate structures, and timing income and expenses. Tax avoidance involves arrangements that technically comply with the law but achieve outcomes parliament did not intend. The ATO can apply Part IVA anti-avoidance rules to cancel benefits from avoidance arrangements.
