Q. I am looking to diversifying my SMSF by investing directly into US equities. I am looking to invest in specific companies as opposed to buying a Managed Fund. Can you tell me how the tax arrangements apply between Australia and US? Do I pay tax in both countries? Can you also advise what is the situation for any gains /losses made in US.
A. With the Australian Share market representing only 2.5% of the total Global Share market, investors have long recognized the importance of diversifying their investments into markets outside Australia. Investing overseas provides an opportunity to invest into sectors that Australians have limited opportunities to invest in due to the size and scope of the Australian Share market. Overseas markets provide access to global brands such as Google, Coca Cola, Apple, Microsoft and Samsung that are not listed locally.
Previously, the ability to invest overseas was largely limited to investing via managed funds as the costs of direct international share ownership were prohibitive and cumbersome. With the advent of online broking, the ability to trade international shares directly has become easier for the individual investor. There are a number of online brokers providing this service to individual investors in the Australian market.
There are restrictions that you will need to consider. You most likely will need to have an Australian broking account in order to open an International account. The minimum trade per stock is usually around $2,000. Broking fees applicable will vary between provider. The broker service will also charge a custodian fee of around .1% p.a on all stocks held overseas.
Dividends earned on international shares will be subject to withholding tax applicable to the specific country. In the US for example, the withholding tax is 30%. If you submit a withholding tax variation in the US, the withholding tax can be reduced to 15%.
As an Australian resident you must declare all foreign income, from all sources on your Australian return. Tax withheld by a country that Australia has a tax treaty with can be claimed as a tax credit on your Australian tax return. Similar to a Franking Credit.
Capital gains or losses on International shares are declared on you Australian return as you would for Australian shares. Be careful though as currency changes need to be taken into consideration. The cost base for the shares will be the purchase price and costs in Australian dollars at the time of purchase. The sale price is the price the stock is sold for, less fees, converted to Australian dollars at the time of sale. The ATO website gives a complete list of all exchange rates in daily tables. Normal Capital Gains discounts apply depending on the ownership type; individual trust, SMSF or company.
The above Q&A was originally published in The Australian.