Hello,
i've been digging a bit deeper into the tax treatment of ETFs and wanted to get some additional thoughts on this topic.
The availability of ETFs on the ASX has improved a lot over time and costs have been getting more comparable to offshore (e.g. with the 'ishares Core' range).
Still, there are still limits on what is available or getting the equivalent US ETF will be materially cheaper in terms of mgmt fee. So plenty of reason to go offshore at times.
The next question is on how this will affect taxation, for example looking at IWLD AU (iShares Core MSCI World All Cap ETF) vs URTH US (iShares MSCI World ETF). Similar funds with similar holdings. (In this example, the AU version has actually the lower mgmt fee)
1. For the Australian ETF i would get a distribution breakdown (example below) which shows a distribution of around 10.9 cent of CGT, but also 12.138 of Foreign Income tax offset. Australian vehicles need to distribute all gains at year end and I would have to pay tax on pass through dividends, CGT and get a credit for the FITO.
2. Holding the offshore ETF, a breakdown of this nature is not provided. As such, my accountant has more or less treated the ETF as a share holding with the distribution taxed as income and only the WHT on the distribtion claimed as FITO. I do miss out on the FITO credit for WHT paid within the ETF, e.g. for Canadian dividends in this US ETF), but then I also don't seem to pay for any CGT component due to the trading within the ETF. To my knowledge, US funds don't have to pay this out at the end of the year, so any distribution would be based on dividends only.
So, in summary, my question is if this a potential loophole where Australian investors don't seem to pay for capital gains due to trading within offshore ETFs (and only realise them when sold)? Or would I need to make up for the lack of reporting and go through annual reports to find the true underlying numbers, which would make offshore ETFs too impractical to own?
As an additional consideration, investors should look at how many FITOs are lost due to the double taxation structure (e.g. Canada to US, US to Australia). This could add up to more than the CGT benefit, but this could be mitigated by buying local ETFs, e.g. US ETFs for US stocks, Euro ETFs for Eurostoxx etc.
This is a bit of a complicated topic, and i probably didn't explain it very well, but there is practically no material on the internet on this. Any thoughts from people who have looked into this would be much appreciated.
Tax SummaryClose (IWLD ETF)
year ended 30-Jun-2020
i've been digging a bit deeper into the tax treatment of ETFs and wanted to get some additional thoughts on this topic.
The availability of ETFs on the ASX has improved a lot over time and costs have been getting more comparable to offshore (e.g. with the 'ishares Core' range).
Still, there are still limits on what is available or getting the equivalent US ETF will be materially cheaper in terms of mgmt fee. So plenty of reason to go offshore at times.
The next question is on how this will affect taxation, for example looking at IWLD AU (iShares Core MSCI World All Cap ETF) vs URTH US (iShares MSCI World ETF). Similar funds with similar holdings. (In this example, the AU version has actually the lower mgmt fee)
1. For the Australian ETF i would get a distribution breakdown (example below) which shows a distribution of around 10.9 cent of CGT, but also 12.138 of Foreign Income tax offset. Australian vehicles need to distribute all gains at year end and I would have to pay tax on pass through dividends, CGT and get a credit for the FITO.
2. Holding the offshore ETF, a breakdown of this nature is not provided. As such, my accountant has more or less treated the ETF as a share holding with the distribution taxed as income and only the WHT on the distribtion claimed as FITO. I do miss out on the FITO credit for WHT paid within the ETF, e.g. for Canadian dividends in this US ETF), but then I also don't seem to pay for any CGT component due to the trading within the ETF. To my knowledge, US funds don't have to pay this out at the end of the year, so any distribution would be based on dividends only.
So, in summary, my question is if this a potential loophole where Australian investors don't seem to pay for capital gains due to trading within offshore ETFs (and only realise them when sold)? Or would I need to make up for the lack of reporting and go through annual reports to find the true underlying numbers, which would make offshore ETFs too impractical to own?
As an additional consideration, investors should look at how many FITOs are lost due to the double taxation structure (e.g. Canada to US, US to Australia). This could add up to more than the CGT benefit, but this could be mitigated by buying local ETFs, e.g. US ETFs for US stocks, Euro ETFs for Eurostoxx etc.
This is a bit of a complicated topic, and i probably didn't explain it very well, but there is practically no material on the internet on this. Any thoughts from people who have looked into this would be much appreciated.
Tax SummaryClose (IWLD ETF)
year ended 30-Jun-2020
| Cash Distribution (Cents-Per-Unit) | 88.111604 |
| Franking Level of distributed income | 0.0000% |
| Cash breakdown of CPU | % of cash distribution |
|---|---|
| Australian sourced income | |
| Interest (subject to Non-Resident Withholding Tax) | 0.0268% |
| Interest (not subject to Non-Resident Withholding Tax) | 0.0000% |
| Franked dividends (net) | 0.0000% |
| Unfranked dividends | 0.0000% |
| Unfranked dividends - CFI | 0.0000% |
| Other income | 0.0000% |
| Foreign sourced income | |
| Foreign sourced income | 75.1569% |
| Net capital gains - TAP | |
| Discounted capital gains - TAP | 0.0000% |
| Capital gains - indexation method TAP | 0.0000% |
| Capital gains - Other method TAP | 0.0000% |
| Net capital gains - NTAP | |
| Discounted capital gains - NTAP | 12.4081% |
| Capital gains - indexation method NTAP | 0.0000% |
| Capital gains - Other method NTAP | 0.0000% |
| Non-assessable income | |
| TOTAL | 100.0000% |
| Other Non-assessable Income (Tax-free amount) | 0.0000% |
| Other Non-assessable Income (Tax-deferred amount) | 0.0000% |
| Other Non-assessable Income (Tax-Exempted amount) | 0.0000% |
| CGT Gross up amount – TAP | 0.0000% |
| CGT Gross up amount – NTAP | 12.4081% |
| Other Non-assessable Income (Return of Capital) | 0.0000% |
| Non-cash distribution components | Cents-per-Unit |
|---|---|
| TOTAL | 12.138016 |
| Franking credits | 0.000000 |
| Foreign income tax offset | 12.138016 |
| GROSS DISTRIBUTION | |
| Gross Distribution | 100.249620 |
