Australian (ASX) Stock Market Forum

Tax on offshore ETFs - Loophole?

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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
Cash Distribution (Cents-Per-Unit)88.111604
Franking Level of distributed income0.0000%
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 dividends0.0000%
Unfranked dividends - CFI0.0000%
Other income0.0000%
Foreign sourced income
Foreign sourced income75.1569%
Net capital gains - TAP
Discounted capital gains - TAP0.0000%
Capital gains - indexation method TAP0.0000%
Capital gains - Other method TAP0.0000%
Net capital gains - NTAP
Discounted capital gains - NTAP12.4081%
Capital gains - indexation method NTAP0.0000%
Capital gains - Other method NTAP0.0000%
Non-assessable income
TOTAL100.0000%
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 – TAP0.0000%
CGT Gross up amount – NTAP12.4081%
Other Non-assessable Income (Return of Capital)0.0000%
Non-cash distribution componentsCents-per-Unit
TOTAL12.138016
Franking credits0.000000
Foreign income tax offset12.138016
GROSS DISTRIBUTION
Gross Distribution100.249620
 
Joined
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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
Cash Distribution (Cents-Per-Unit)88.111604
Franking Level of distributed income0.0000%
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 dividends0.0000%
Unfranked dividends - CFI0.0000%
Other income0.0000%
Foreign sourced income
Foreign sourced income75.1569%
Net capital gains - TAP
Discounted capital gains - TAP0.0000%
Capital gains - indexation method TAP0.0000%
Capital gains - Other method TAP0.0000%
Net capital gains - NTAP
Discounted capital gains - NTAP12.4081%
Capital gains - indexation method NTAP0.0000%
Capital gains - Other method NTAP0.0000%
Non-assessable income
TOTAL100.0000%
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 – TAP0.0000%
CGT Gross up amount – NTAP12.4081%
Other Non-assessable Income (Return of Capital)0.0000%
Non-cash distribution componentsCents-per-Unit
TOTAL12.138016
Franking credits0.000000
Foreign income tax offset12.138016
GROSS DISTRIBUTION
Gross Distribution100.249620


From what I am aware; Australian residents must declare all foreign income to the ATO. The ATO will assess the foreign income based on the jurisdiction and you may have to pay a tax shortfall to the ATO.

A legal way around to pay minimal CGT tax (10%) to the ATO for shares/equities, that I am aware of is:

- Be a dual citizen with another nation that doesn't have such heavy taxation for CGT for shares/equities
- Buy a property in the other country
- List yourself as a foreign resident in Australia
- Fly in and out between the countries every few months

Not really worthwhile unless you have 10s of millions of dollars worth of assets and the time to fly in and out.

Another option is to trade CFDs and declare yourself as a hobby trader; however you will need to keep your trades to a minimum to satisfy the ATO.
 
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From what I am aware; Australian residents must declare all foreign income to the ATO. The ATO will assess the foreign income based on the jurisdiction and you may have to pay a tax shortfall to the ATO.

This is not about not declaring foreign income. The offshore ETF is paying distributions, which are declared as foreign income.

It is just that e.g. US ETFs only seem to distribute dividend income, but not the underlying capital gains which occur within the ETF. So the taxable distribution is lower compared to Australian ETFs.
 
Joined
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This is not about not declaring foreign income. The offshore ETF is paying distributions, which are declared as foreign income.

It is just that e.g. US ETFs only seem to distribute dividend income, but not the underlying capital gains which occur within the ETF. So the taxable distribution is lower compared to Australian ETFs.

In my view ETF distributions are a substitute for dividends; as such a foreign income if you're an Australian resident. I believe the ATO will then require you to pay a tax shortfall compared to the USA, if you're an Australian citizen and resident.

So you get X amount in a foreign income distribution from an ETF in the USA. USA tax laws require the distribution to be taxed at X %. The ATO then will work out what you would be taxed if you received the ETF distribution in Australia; and you will pay the tax difference according to Australian resident income tax laws.

I provided you with the legal ways, that I am aware, to pay minimal tax for shares/equities as an Australian citizen investing in Australia; whether it is capital gains from sale of shares, dividends or distributions from ETFs.

You should ask the ATO directly if you do your own tax.
 
Last edited:
Joined
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This is not about not declaring foreign income. The offshore ETF is paying distributions, which are declared as foreign income.

It is just that e.g. US ETFs only seem to distribute dividend income, but not the underlying capital gains which occur within the ETF. So the taxable distribution is lower compared to Australian ETFs.

Another avenue is to set up an off-shore company in a tax-haven jurisdiction like the Cayman Islands to invest in global markets (https://www.ciregistry.ky/companies-register/types-of-companies/); if you have enough money to do so. As the managing director pay yourself X amount from the company each year, but you would have to pay Australian income tax on your wages if you're an Australian citizen and resident.

Probably best that you speak with the ATO or an expert tax professional
 
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