Author Topic: Australians - double taxation on international shares  (Read 3190 times)

bigchrisb

  • Handlebar Stache
  • *****
  • Posts: 1131
Australians - double taxation on international shares
« on: February 11, 2014, 04:35:12 PM »
I've been trying to get my head around a couple of issues with the tax issues from holding international shares in Australia.  I've contacted both Vanguard and Ishares here about it, but both have stated that they don't provide taxation advice.  So I thought I'd put it to the Mustachian community and see what they thought.  For reference, I hold VEU, VTS and IVV all through their cross-listed ASX funds, with a total balance of about $400k between them.

1. Foreign tax credits.  Filling out a W8-BEN form gets you international taxation at the 15% rate.  The tax treaty between Australia and the US means that this then shows as a foreign tax credit on your Australian return - i.e. a non-refundable offset.  I'm paying a fair whack of tax while I'm in the accumulation phase, so at the moment this is OK. Longer term, I may not be paying tax in my "spend" phase (say in a SMSF in the pension phase - tax free).  From what I can see, this means that these sorts of funds will still end up taxed at 15%, as the foreign tax credit isn't refunded like a franking credit.  Anyone given thoughts on how to structure this?  It would seem that holding foreign shares inside super is tax inefficient, and I should hold these outside super (e.g. discretionary trust)?

2. Treatment of franking credits on cross listed funds.  If I held Australian shares directly, I'd be getting a 30% franking credit with most of my dividends.  This streams through on Australian shares ETFs just fine.  The problem seems to be cross listed funds, with a component of Australian shares in them, where it seems to vanish.  For example, I hold about $200k of VEU, which has approx 6% invested in AUS/NZ.  So there is $12k of Australian shares in my VEU holding.  Based on the average yield on ASX stocks (4.6%) and 100% franking, that $12k would generate about $240 in franking credits.  $240 on $200k is 0.12%, or an almost doubling of the effective MER of the fund.  Anyone managed to figure out  how to claim the imputation credits on these?

Any thoughts from the aussie Mustachains?   

superannuationfreak

  • Stubble
  • **
  • Posts: 123
  • Location: Melbourne, Australia
Re: Australians - double taxation on international shares
« Reply #1 on: February 11, 2014, 07:03:32 PM »
For point 1, I suppose you are right: after you are in the pension phase, if your other (taxable) income is enough to actually pay tax it will be relatively tax inefficient to hold those assets in Super.  However at that point you're also not paying capital gains tax so can sell, and then buy similar assets outside of Super if you wish (or you may wish to de-risk over time anyway by reducing your share allocation).

For point 2 I also hold VEU at the moment and there isn't anything we can do about non-US taxes including those generated by (unfranked dividends from) Australian assets.  Two things to keep in mind with VEU.  First note that any taxes withheld by non-US countries can't be gotten back even as an offset, only the 15% you mention in point 1.  Second, in principle I don't think the franked portion is taxed as VEU is a non-Australian entity and so I wouldn't think will have tax withheld on franked, e.g.:
http://www.ato.gov.au/Individuals/Investing/In-detail/Receiving-interest-and-dividends/You-and-your-shares-2012-13/?page=14

There are options that do not suffer the double taxation from point 2, however they generally have higher fees (e.g. I believe WXOZ is an Australian entity holding only non-Australian shares, so will report tax withheld from, for example, European countries which can be offset in your tax return)