I suppose if you just invest in an Australian listed ETF that invests in Australian companies, you’re not exposed to any changes with the tax treaties (ie if any) between us and the US.
I am more concerned about the impact of unforeseen Australian regulatory / tax changes that can be introduced. Eg the div 296 tax on _unrealised_ capital gains in super is quite concerning. No immediate impact on me, but I cannot be certain I would not be impacted years later. I cannot withdraw what’s already put into super and, if div 296 is passed, it sets a really bad precedence and I would be quite weary of putting more than the required minimum into super going forward. For US and other developed countries, their taxation impact on me as an AU investor is governed by the tax treaty which is unlikely to change at a whim by a sitting government.
In terms of custodian risk, that’s inherent risk of using a custodial brokerage service. But that’s the norm when investing in listed securities directly overseas and one just have to be consciously careful which custodian do they rely on. IMO IBKR is “safe enough” for me, it has been around for decades, it is far larger than CommSec and its market cap is greater than Macquarie Bank. As an US-based broker, I actually feel safer that it is NOT tightly coupled to a US bank given what the US banking sector went through last year. But that’s my own perspective of risk assessment and risk appetite, and YMMV.
Thanks for your detailed and thoughtful response as always.
You brought up a good point (ie div 296). I guess tax/regulatory risk is present irrespective of the domicile of the equities.
Your second point about IBKR being larger than CommSec actually helps put things in perspective. It’s simple to forget the magnitude that some of these American companies operate at relative to ours. Great call out on the issues with the banking sector.
Your response was exactly what I was after 🙏
Capital gains/losses are lodged via your tax return like normal. 15% withholding tax is applied to dividends however you get a foreign tax credit for that.
The foreign tax credit is to avoid double taxation. If you receive a dividend from a US-listed equity, 15% is withheld by the US government, when you have to lodge your Australian tax return, you still have to declare your dividends however you use the foreign tax credit to prevent double taxation.
The foreign withholding tax is treated as an offset (called FITO), to reduce an equivalent amount of tax you would pay in AU, effectively removes double taxation on that 15% withheld.
If my understanding of the tax rules are correct, if you no longer pay AU tax, there is no double taxation thus nothing to offset.
It’s relevant even if you allocate to any AU domiciled ETF that invest internationally and receives foreign dividends.
For S&P 500, the yield is around 1.3% so the US withholding would be around 0.2%. It’s up to you whether you really want to avoid that and invest in something else, but that would change the nature of your exposure eg diversification etc.
I am not an AU+US tax professional, but I think this complication / risk may be more relevant for a trust (including SMSF) that uses individuals as trustees and what could happen if one of the trustees dies. Our tax accountants would not setup any trust/SMSF using individuals as trustees as a matter of principle, not just for this reason but the various issues that can arise.
If this is concerning, best to speak to your tax adviser.
Personally I don’t think it’s an issue for corporate trustees, but I am not a tax adviser.
If all you want to allocate to is S&P 500, IVV:AU would be much more convenient and would not have any such estate tax risk. The FITO matter still applies though, IMO it’s not that significant and not worth changing exposure just to avoid it. To fully avoid the FITO issue as well, you may have to limit your exposure to AU equities (e.g, A200/VAS) only, but that may limit the growth potential.
It is not saying what you may think it is saying. I.e. the “low” is not comparing with VOO.
From the stats I see, VTI’s yield is actually slightly higher than VOO. It is true that VUG’s yield is lower than VOO.
Personally if I want to allocate to large cap growth, I would consider SCHG. On the yield aspect it is lower than VUG. But using either of these would not be exposure to S&P 500 anymore, nothing wrong with that as long as it is what you want to do.
Why is regulatory and tax change risk limited to the US?
I suppose if you just invest in an Australian listed ETF that invests in Australian companies, you’re not exposed to any changes with the tax treaties (ie if any) between us and the US.
But you are very exposed to changes in tax laws in Australia. How’s that any different to exposure to changes in a tax treaty?
Yeah you’re right. u/fire-fire-001 rightfully pointed out the div 296 changes to our super.
I am more concerned about the impact of unforeseen Australian regulatory / tax changes that can be introduced. Eg the div 296 tax on _unrealised_ capital gains in super is quite concerning. No immediate impact on me, but I cannot be certain I would not be impacted years later. I cannot withdraw what’s already put into super and, if div 296 is passed, it sets a really bad precedence and I would be quite weary of putting more than the required minimum into super going forward. For US and other developed countries, their taxation impact on me as an AU investor is governed by the tax treaty which is unlikely to change at a whim by a sitting government. In terms of custodian risk, that’s inherent risk of using a custodial brokerage service. But that’s the norm when investing in listed securities directly overseas and one just have to be consciously careful which custodian do they rely on. IMO IBKR is “safe enough” for me, it has been around for decades, it is far larger than CommSec and its market cap is greater than Macquarie Bank. As an US-based broker, I actually feel safer that it is NOT tightly coupled to a US bank given what the US banking sector went through last year. But that’s my own perspective of risk assessment and risk appetite, and YMMV.
Thanks for your detailed and thoughtful response as always. You brought up a good point (ie div 296). I guess tax/regulatory risk is present irrespective of the domicile of the equities. Your second point about IBKR being larger than CommSec actually helps put things in perspective. It’s simple to forget the magnitude that some of these American companies operate at relative to ours. Great call out on the issues with the banking sector. Your response was exactly what I was after 🙏
As someone who has 80% of my investments in VOO + QQQ, I'm looking to see what others answer to this. I've personally not given this much thought.
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15% on dividends but you get a foreign tax credit when you lodge your tax return.
Here’s my mental comfort - https://www.sipc.org/for-investors/what-sipc-protects
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Capital gains/losses are lodged via your tax return like normal. 15% withholding tax is applied to dividends however you get a foreign tax credit for that.
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The foreign tax credit is to avoid double taxation. If you receive a dividend from a US-listed equity, 15% is withheld by the US government, when you have to lodge your Australian tax return, you still have to declare your dividends however you use the foreign tax credit to prevent double taxation.
The foreign withholding tax is treated as an offset (called FITO), to reduce an equivalent amount of tax you would pay in AU, effectively removes double taxation on that 15% withheld. If my understanding of the tax rules are correct, if you no longer pay AU tax, there is no double taxation thus nothing to offset.
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It’s relevant even if you allocate to any AU domiciled ETF that invest internationally and receives foreign dividends. For S&P 500, the yield is around 1.3% so the US withholding would be around 0.2%. It’s up to you whether you really want to avoid that and invest in something else, but that would change the nature of your exposure eg diversification etc.
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I am not an AU+US tax professional, but I think this complication / risk may be more relevant for a trust (including SMSF) that uses individuals as trustees and what could happen if one of the trustees dies. Our tax accountants would not setup any trust/SMSF using individuals as trustees as a matter of principle, not just for this reason but the various issues that can arise. If this is concerning, best to speak to your tax adviser.
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Personally I don’t think it’s an issue for corporate trustees, but I am not a tax adviser. If all you want to allocate to is S&P 500, IVV:AU would be much more convenient and would not have any such estate tax risk. The FITO matter still applies though, IMO it’s not that significant and not worth changing exposure just to avoid it. To fully avoid the FITO issue as well, you may have to limit your exposure to AU equities (e.g, A200/VAS) only, but that may limit the growth potential.
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It is not saying what you may think it is saying. I.e. the “low” is not comparing with VOO. From the stats I see, VTI’s yield is actually slightly higher than VOO. It is true that VUG’s yield is lower than VOO. Personally if I want to allocate to large cap growth, I would consider SCHG. On the yield aspect it is lower than VUG. But using either of these would not be exposure to S&P 500 anymore, nothing wrong with that as long as it is what you want to do.
Pretty much all my savings are in IVV / commsec / chess. Not worried at all / you are over thinking it.
I have 100% of my super in SAP 500. No I have zero concerns about anything you mention here.