Buying shares offshore: Tax issues you need to know

At Eureka Report, we've been saying for some months now that it's time for investors to look overseas. The falling Australian dollar makes currency gains look attractive, particularly in the US. Australian companies make up only a tiny percentage of all the listed companies in the world, meaning there are many opportunities beyond our shores. And those investors with a dim view of the Australian economy's outlook may wish to look for growth stocks elsewhere.

Our international equities expert Clay Carter recently published two lists of high-conviction, actively managed international stock portfolios, with different levels of risk and return (see The high conviction offshore portfolio, January 12). “Start now,” he exhorted investors.

Now let's take a look at international share investing from a tax perspective.

Buying

Before buying shares in any country outside Australia, do some research and make sure you understand the tax implications, recommends KPMG tax partner, Dan Hodgson. “The important thing is to do appropriate due diligence up front to know what you're getting yourself into.”

When buying US securities (including shares, ADRs, exchange-traded funds, etc), the simplest way to avoid double taxation is to fill in the W-8BEN form first. Otherwise, US rules require payers of dividends to foreigners to withhold tax at a rate of 30%. But an agreement on double taxation between the two countries allows some relief from this. To take advantage of this, it's necessary to complete the form. Click here to download the W-8BEN form (it's only one page), or click here to see instructions from the IRS about this form, or click here to see instructions from Computershare.

The completed form must be provided to the payer of the dividend. “If you invest with Coca-Cola and General Motors, for example, you need to provide a W-8BEN form to each [payer of the dividend],” Hodgson says.

Brokers will often deal with this paperwork for their clients, although it varies between brokers. For example, CommSec says their clients only fill in the form once and then it's valid for three years. Each time a client trades, CommSec will lodge the form.

The W-8BEN form is specific to purchases of US shares. Hodgson says although he is not aware of any other jurisdictions where an equivalent form is required, investors should check their obligations in the individual country where they are making an investment.

Receiving dividends

Consider an investor who has made an investment in a US-listed company and provided a W-8BEN form. Say the company pays a dividend of $100 to the investor. The dividend payer must withhold tax at a rate of 15%, meaning the investor actually receives $85, explains Fortrend investment adviser Chris Wollermann. He says that for clients of the Melbourne-based, globally-focused broker, the clearing firm that administers the accounts on behalf of clients withholds the money from clients' accounts. If the W-8BEN form has not been lodged, 30% tax is withheld, meaning an investor would only receive $70 of the $100 dividend. “It's similar to in Australia, where if you don't declare your tax file number, the top marginal rate is applied,” Wollermann says.

When it's time for this investor to lodge their tax return with the Australian Tax Office, they must disclose the full amount of the dividend – $100 in our example. They can claim a credit for the $15 paid under the withholding arrangements. Their residual Australian tax liability then depends on their own marginal tax rate. If someone pays tax at a rate of 34%, they would have to pay another $19 in tax. If they pay the highest rate of 49% tax, they would have to pay another $34 in tax. A self-managed super fund that pays 15% tax could claim the credit for the $15 already paid and keep the $85 without having to pay any extra tax, or receiving any extra return.

For companies listed in the UK, there is no income tax payable on dividends if investors are non-residents with no ties to the UK, Hodgson says. Although an investor does not have to pay income tax to the UK, they must still declare the dividend income on their Australian tax return and pay tax at their own marginal rate.

Australian investors, of course, are used to receiving fully franked dividends. But Hodgson points out that the attraction of foreign stocks is more about capital appreciation, rather than yield. “The investor should be looking at the rate of return knowing they'll be paying the marginal rate of tax on foreign dividends and making the assessment that way.”

Selling

The tax exposure to foreign shares is largely around the US and mainly to do with dividends. 

KPMG advises that there should be no US withholding tax on the sale of US stocks by a non-resident of the US. This means an investor would receive the full proceeds of the sale and declare the gain on their Australian tax return. For UK-listed companies, investors who are not residents of the UK do not have to pay UK capital gains tax, KPMG says. Each country has its own rules, but Australia has tax treaties with a range of countries to prevent double taxation (more information is available on the ATO website here and on the Treasury website here).

In Australia, there is no difference in the rules around capital gains tax for selling foreign shares and for selling Australian shares. In both cases, the capital gain is the difference between the purchase price and the sale price, and is taxed as part of an investor's income, with a 50% discount for assets held for 12 months or more.

Hodgson says investors should consider the impact of exchange rates on the purchase price and sale price of foreign shares. He says when completing a tax return, the cost of the share is the Australian dollar equivalent, based on the foreign exchange rate at the time of purchase. The sale proceeds are then converted to Australian dollars at the exchange rate at the time of sale. So both the buy price and sell price should be in Australian dollars, based on the exchange rate on the purchase date and sale date respectively.

Strong moves in foreign currency may mean that an investor has a significant capital gain to report, even if a company's share price has moved modestly or not at all. Consider an investor who buys shares in a US-listed company for $US10 each, and sells them for exactly the same price in US dollars. Say the investor bought the shares when the currencies were at parity: they paid $A10 per share. Say that when the investor sold the shares, the Australian dollar had fallen to US80 cents: they received $A12.50 per share. The investor has made a gain of $A2.50 per share due to the currency effect, even though the stock has been unimpressive. As the Australian dollar slides, the gains on offer look attractive, but the tax implications are worth keeping in mind.

If an investor makes a capital loss in Australian dollars, this is available to offset against any other capital gains, as is the case with capital losses on Australian investments.

Wollermann points out that foreign investing is now a well-worn path, with broad similarities in terms of taxation for investments in many countries. But he still recommends clients seek tax advice from a qualified person.

Hodgson says that investors should look for a tax adviser who has a presence in the location in question. “I would not be comfortable going to an Australian accountant with no contacts overseas to get this advice. It's very specific to the location you're investing in,” he says. But he adds some words of encouragement: “Tax does not need to be an inhibitor to investing overseas.”

Do you have any questions about the practicalities of international investing? Click here to send us an email.