Author Topic: Tax implications when investing in overseas index funds / ETFs?  (Read 3136 times)

lost and found

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Tax implications when investing in overseas index funds / ETFs?
« on: September 09, 2024, 02:17:42 AM »
Hi all

I'm a kiwi and curious how Australians are taxed on their overseas index funds / ETFs?  And how do you you take it into account in your early retirement plans?

I'm keen to understand how it compares to NZ - which is quite unfavorable :-(


Thank you


Notch

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Re: Tax implications when investing in overseas index funds / ETFs?
« Reply #1 on: September 09, 2024, 04:21:35 AM »
My Australian-listed international ETFs are treated the same as my Australian ETFs.  They just don't come with refundable franking credits.  Instead any foreign tax paid is only offset against your tax bill.

I have limited international shares, but the capital gains and dividends from them were treated the same as Australian shares.

lost and found

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Re: Tax implications when investing in overseas index funds / ETFs?
« Reply #2 on: September 09, 2024, 05:35:55 PM »
So in Australia, if you purchase and international ETF you are taxed on the dividends and then you pay a capital gain tax when you sell.  How much is the capital gains tax?

chasingthegoodlife

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Re: Tax implications when investing in overseas index funds / ETFs?
« Reply #3 on: September 09, 2024, 11:49:49 PM »
Capital gains are taxed at your marginal tax rate, with a 50% discount if you have held the asset for more than a year.

mspym

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Re: Tax implications when investing in overseas index funds / ETFs?
« Reply #4 on: September 10, 2024, 01:03:10 AM »
I was going to say the tax situation in NZ is actually comparatively favourable as long as you hold your international assets through an NZ-based platform.  No CGT and you aren’t subject to the reporting requirements and assumed 5% return. Either MoneykingNZ or MoneyHub go into quite a bit of analysis of the pros and cons of holding directly vs through an NZ-domiciled platform.

I know people here like to complain about the tax-burden but it’s actually quite advantageous for investors compared to income. 

lost and found

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Re: Tax implications when investing in overseas index funds / ETFs?
« Reply #5 on: September 10, 2024, 02:09:12 AM »
Hi @mspym  I'm not so sure, a lot of the US early retirees are paying next to nothing in tax.  Whereas us Kiwis generally pay   5%*28%=1.4% of the investment value per year.  That's 35% of the 4% safe withdrawal rule of thumb.   I'm not sure that's terribly favorable.

EDIT: admittedly you can reduce the overall drag of 1.4% by:
1. increasing home country bias
2. for a couple, split the investment accounts between 2 tax payers
3. investing directly (not in a PIE) and swapping between the FDR and CV methods when the market return is less than 5%
« Last Edit: September 10, 2024, 02:53:43 PM by lost and found »

mspym

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Re: Tax implications when investing in overseas index funds / ETFs?
« Reply #6 on: September 10, 2024, 04:15:52 PM »
option 4:  Use an investment vehicle that isn't subject to FIF i.e. "NZ domiciled funds and ETFs that invest in foreign markets e.g. Smartshares’ and Kernel’s international funds". That means you only pay tax on the dividends not on the capital gains.

https://moneykingnz.com/what-taxes-do-you-need-to-pay-on-your-investments-in-new-zealand/
https://moneykingnz.com/tax-on-foreign-investments-how-do-fif-and-estate-taxes-work/

I've looked through your post-history and given your income level and holdings, it would pay to talk this through with a proper tax advisor. Right now, your tax will be high because of your income, however once that fire-hose of cash isn't coming in AND if you structure your holdings with the advice of a properly credentialed investment advisor/accountant, then your income as far as the IRD is concerned is your dividend/interest income, which will be a significantly lower rate.

As an example and absolutely not as advice, since I am not earning income other than my dividends and interest, my tax rate [RWT and PIR] is somewhere between 10.5 and 17.5%. I can sell holdings to cover expenses but that's not counted as "income" other than in my head to make me feel ok about spending it. If I was in Australia, then yes I'd have the overall tax-free threshold for income tax but both dividends and capital gains for any holdings I sell would count towards my overall income tax level. Make sense?

TL:DR talk to an actual tax advisor. It's worth it.

lost and found

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Re: Tax implications when investing in overseas index funds / ETFs?
« Reply #7 on: September 10, 2024, 05:55:57 PM »


option 4:  Use an investment vehicle that isn't subject to FIF i.e. "NZ domiciled funds and ETFs that invest in foreign markets e.g. Smartshares’ and Kernel’s international funds". That means you only pay tax on the dividends not on the capital gains.

All foreign investments (ex Australia) are subject to FIF, even those held in NZ domicile fund (such as Kernel).  They have apply the FDR method which deems there to be a dividend equivalent to 5% of the value of the investment.  There is no getting around that unless you invest directly in a FIF and stay below the $50k de minimis threshold.   

Here are some good explanations

https://kernelwealth.co.nz/blog/how-does-tax-work-when-investing-in-kernel-funds

https://www.myfiduciary.com/uploads/1/1/3/9/11394355/tax-paper_final-digital-v2.pdf

Thanks very much for your thoughts!




mspym

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Re: Tax implications when investing in overseas index funds / ETFs?
« Reply #8 on: September 10, 2024, 11:49:17 PM »
Interesting, thanks for the info. I’ll be more accurate in future.