Would appreciate some Australian assistance on the following two-parter. Basically I want to know whether I am thinking about these correctly.
1) Assume I go back to Australia after a several-year hiatus. I'm 35 years old. I wire 450K from overseas to Vanguard Australia, and purchase 225K worth of their ASX 300-tracker and 225K worth of their MSCI World ex-Australia-tracking fund.
Using the infallible 4% Rule, I withdraw $18,000 a year (keeping me within the zero tax bracket). I do this by submitting a withdrawal form to Vanguard every month for a tax-free $1500. Now, I mentioned this to a friend and he said "Oh but you'll pay Capital Gains Tax on every withdrawal!!1" Started looking into this, head exploded.
I have not yet needed to perform a withdrawal from my Vanguard account, so I am unclear as to the precise details. However, there are two basic ways I can see Vanguard treating it (ignoring selling spread, which would occur either way):
1) Applying some withholding rate to your withdrawal. Similar to PAYG tax, and could occur one of two ways: (1a) they send you the $1500 net of any withholding tax and take out slightly more than $1500 from your account, or (1b) send you $1500 minus any withholding tax, so your account is decreased by exactly $1500 but you get slightly less in pocket.
I have heard of people working two jobs being under-taxed because their second job does not set the withholding rate high enough. This implies to me that companies are generally not informed as to an individual's correct withholding rate, and this is up to the individual to inform the company. Therefore I think situation 1 is unlikely. More likely is situation 2:
2) Vanguard takes $1500 from your account and sends you $1500. They send you the tax statement at the end of the year. You are liable to pay tax on any dividends you have received from the whole balance of the investment account, plus any capital gains on the amounts you have withdrawn ($18k). Given you bought the units in a lump sum, after the first year any capital gains should be subject to the 50% discount (assuming no further purchases of units).
The ATO can require a person whose investment income exceeds a certain threshold to report and pay instalments of tax quarterly or semi-annually. The threshold is $2,000 gross, subject to a number of exceptions (less than $500 tax payable, notional tax less than $250, and the third is irrelevant for a 35-year-old). However, as I understand it the ATO will tell you that you need to pay instalments only after the first tax return you lodge in Australia that exceeds that $2,000 gross income from investments, and will tell you what instalment you should pay.
Because capital gains tax only becomes due when it is realised (you have sold the asset), CGT is only relevant on the total of $18k withdrawals. In theory, if your $450k of investments earns 3% in dividends and 1% in capital appreciation, and we are being lazy and allowing me to assume you make one $18k withdrawal on 30 June each year, the capital gains in the first year will be $4500 and the dividends will be $13,500 for a total of $18,000, so you will have zero tax payable as your income falls within the tax-free threshold. However, and even better, if the dividends are fully franked, their grossed-up value will be $19,286 (rounded) and you will have had the companies pay $5,786 in tax on your behalf -> which, in our shiny hypothetical, means that your actual income would be assessed at $23,786 (capital gains plus gross dividends), but having paid $5,786 in tax, you would be entitled to a notional refund of (5,786 less (19% of 5586 = 1061)) $4725, or thereabouts. It would actually be slightly less, because the Medicare levy would start phasing in at 10% from $20,542 up to a max of 1.5% of total income ($357) -> the difference is 23,786-20,542 = 3244, 10% on that is $324.40, so you would be due for $324 or so. But that comes off the refund you'd get from all those franking credits anyway, so in the worst case you'd only get a $4.4k refund.
Mmm, tax. Please note: I Am Not An Accountant, this is not professional advice, speak to a tax agent.
In short, however, you will be taxed each year on the dividends you receive (even if they are reinvested) and on any capital gains on the units that you sell within the year. However, thanks to the black magic of franking and your otherwise negligible income, you will probably get a tax refund every year.
TLDR: Vanguard will give you a nice statement at the end of every year that tells you the numbers you need to plug into your tax return. As long as your total income is low and you get dividends, you'll get a refund cheque. Worst case, hire an accountant for an hour or two a year to do your taxes.
PS: Lol, Capital Gains. Situation 2 coming up soon.
