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Antipode(Newbie)Newbie
12 Dec 2023

I would like to understand the tax implications of holding US-domiciled exchange-traded funds (ETFs) as an Australian tax resident.


The ETFs are held in a US brokerage account, and make distributions through the year in USD.


My questions are:

  1. Would the foreign ETF distributions be taxed as ordinary income in Australia? (If not - how are they taxed?)
  2. Is there different tax treatment depending on the nature of the distribution, for example, capital gain distribution vs dividends?
  3. Do I use the USD/AUD spot exchange rate on the date of receipt (date they are credited to the brokerage account) to calculate the income in AUD for taxation purposes?
  4. If, after receiving a distribution in USD, I later send the money to Australia (i.e., convert the USD to AUD), do I have to account for any potential gain/loss resulting from fluctuations in the foreign currency exchange rate between the date of receipt and the date of conversion?

Thanks

2,995 views
5 replies
2,995 views
5 replies

Most helpful response

Most helpful reply

AriATO(Community Support)Community Support
14 Dec 2023

Hi @Anitpode


Is this the same as a managed fund where you get statements each year with a breakdown of your distributions?


As an Australia tax resident, you'll let us know about your income from your ETF's. If you pay tax overseas you might be entitled to a foreign income tax offset.

You'll still be taxed on your total income at your marginal tax rate. It's more about getting your reporting right in your tax return which we can help with if you know what your distributions are classed as. If you have capital gains you may be entitled to the CGT discount or apply capital losses if you have any.

You'd need to convert your income to AUD at specific times, and you can check out the rules for translating foreign amounts on our website.

You may have to account for forex gains or losses, depending on the situation. If you have a CGT event, the exchange rate fluctuation is usually folded into the CGT calculation. It's easier to let you know if it applies if you can give us a scenario.

All replies

Most helpful reply

AriATO(Community Support)Community Support
14 Dec 2023

Hi @Anitpode


Is this the same as a managed fund where you get statements each year with a breakdown of your distributions?


As an Australia tax resident, you'll let us know about your income from your ETF's. If you pay tax overseas you might be entitled to a foreign income tax offset.

You'll still be taxed on your total income at your marginal tax rate. It's more about getting your reporting right in your tax return which we can help with if you know what your distributions are classed as. If you have capital gains you may be entitled to the CGT discount or apply capital losses if you have any.

You'd need to convert your income to AUD at specific times, and you can check out the rules for translating foreign amounts on our website.

You may have to account for forex gains or losses, depending on the situation. If you have a CGT event, the exchange rate fluctuation is usually folded into the CGT calculation. It's easier to let you know if it applies if you can give us a scenario.

Antipode(Newbie)Newbie
15 Dec 2023

Thanks for reply. 


Yes, this would be similar to a managed fund, where the distributions from the fund through the year may be 'dividend distributions' or 'capital gains distributions'. 


Note that this is not capital gains from sale of ETF units; I'm only asking about fund distributions that are normally received over the course of holding the ETF shares. 


The tax statements for my US brokerage from previous years shows the following types of dividends and distributions: 

  • Ordinary dividends 
  • Qualified dividends ('qualified' relates to US tax treatment, which I assume is irrelevant in terms of ATO treatment)
  • Section 199A dividends (again relates to US tax treatment, which I assume is irrelevant in terms of ATO treatment)
  • Exempt-interest dividends (these are from US municipal bonds, which are tax-exempt from federal US taxes, again assume this is irrelevant in terms of ATO treatment)
  • Capital gains distributions
  • Nondividend distributions (as I understand it these are not taxable in the US, may include 'return of capital', unsure how these are treated from ATO perspective?)

I'm trying to get a handle on how each of these would be treated from an ATO perspective. 


The second part of my question relates to what happens when this money is converted to AUD on a later date. For example, say I hold a US ETF which makes a 'nonqualifed dividend' distribution of $100 USD on September 22. The AUD/USD exchange rate was 0.6442 on this day, so the value of this distribution in AUD is $155.23 on the day that it is received.

Let's say that on October 13, I then convert this USD$100 to AUD and transfer it to an Australian bank account. However, at the time of conversion, the exchange rate is 0.6228, so the amount of AUD received is $160.57. 


How is this situation treated from an ATO tax perspective? Do I have $155.23 of taxable income, plus $5.34 of forex gains, or something else? 


Note that this is all hypothetical at this point; I'm not currently an Australian tax resident, however I'm trying to determine implications of continuing to hold US ETFs after becoming one in the future. 


Thanks

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How are foreign ETF distributions taxed, and what are the tax implications for conversion to AUD? | ATO Community