In today’s interconnected world, many people are looking far beyond Australia’s shores to make money. Increasingly, they are looking out into the world and choosing to invest in foreign stocks and shares as an alternative to Australian investments. The investments themselves might be unfamiliar but they potentially come with a whole new layer of uncertainty regarding the tax implications of the investment, both here and in the country of origin.
Receiving a foreign dividend
If you are an Australian resident, you will be taxed on all your worldwide income, regardless of its source. So, foreign dividends need to be declared and Australian tax paid in respect of the dividends.
You might be familiar with the franking credits that come with Australian dividends that reduce the tax you have to pay by the tax that the paying company has already paid on the profits out of which the dividend was paid.
With foreign dividends, however, there are no franking credits and the corporate tax which has already been paid in the company’s home country cannot be recouped or offset.
In addition, you may be taxed on the dividends not only in Australia but in the home country of the paying company.
For example, in the US, withholding tax is automatically applied to the dividend. It is important to note, however, that not this is not a universal practice - for example, the UK does not apply withholding tax to dividends, meaning that non-UK resident individuals can potentially choose for their UK sourced investment income, including dividends and interest, to be disregarded for UK tax purposes. This so-called ‘disregarded income’ can then be received free from UK income tax.
To limit double taxation in Australia, investors are given a foreign income tax offset where there’s a tax liability (perhaps due to withholding tax) from the investment’s country of origin. This can be claimed as a credit against the Australian tax payable on foreign income if you are an individual investor or investing through a trust.
To understand both the foreign tax and the Australian tax implications, including getting tips on how best to structure your investments, it is recommended that you speak to a tax professional in both countries for advice.
Capital Gains Tax on foreign investment
When you choose to sell your investments, this may trigger capital gains tax. Capital gains tax on international investments are taxed in the same way as Australian investments.
You still receive a 50% CGT discount on assets that are held for more than 12 months, and the remaining gain is added to your assessable income for the year.
The country where you have invested may have a capital gains tax or equivalent. If you have paid this tax overseas, you may be eligible for a foreign income tax offset.
Note that if you benefit from the 50% CGT discount, you may only be eligible to receive half of the foreign income tax offset you’d normally expect, in recognition of the fact that, in effect, only half of the gain is assessable income in Australia.
Foreign exchange gains/losses on foreign investments
Your tax return must be filed in Australian dollars. That means that the amount of the foreign currency gains or profits that you receive on international investments must be converted to Australian dollars. When you’re declaring income from international investments, two rates must be used depending on the circumstance.
In addition, to work out capital gains and losses you need to calculate the Australian dollar equivalent of the sales proceeds (converted at the date of sale) and take away the Australian dollar equivalent of the acquisition cost (converted at the date of acquisition). It isn’t enough to simply covert the foreign currency gain into Australian dollars!
What deductions can I claim?
You are entitled to deduct any expenses associated with earning your foreign investment income, in much the same way as applies to Australian income.
For specifics on what is eligible, consult a tax professional.
Investing internationally through managed funds or ETFs
These investment products are increasingly popular because they enable investors to invest in a wide range of financial products, including overseas shares. The investments are managed for you by a fund manager, meaning that all you need to do is pay a sum of money to the fund and leave the rest to the fund managers.
You do not need to declare the income and capital gains from each asset contained within the investment. Instead, investors will receive an MIT (managed investment trust) annual statement that will declare all investment income, any capital gains that have occurred, and any foreign tax offset within three months after the end of financial year.
Written by Mark Chapman, Director of Tax Communications at H&R Block.