Eureka Correspondence

W8-BEN forms, top 10 returns, locating bond advisers, and more.

Instructions for the W8-BEN form

I would like to add to the letter regarding the W-8BEN.

I have also decided never to buy anything requiring this form as I have filled one in five times and each time it was returned and I was unable to get any help as to why.

On looking at the instructions, of which you provided a copy, there is absolutely no reference to the position of an Australian super fund or self-managed super fund so they are no help at all.

I had presumed that it required both of the trustees to fill in a form as joint partners but this was also returned as incorrect.

Similar to MM I was hoping you could give a bit more information as the instructions just do not cover it!

Phil Rosewarne

Given many comments made regarding international share exposure, I was wondering if we were to run with an international exchange-traded fund, such as an American listed one, would we need to file a W-8 BEN form that looks to take around eight hours to do including reading all the instructions?

Are international ETFs in general subject to the same issues as direct share holdings in regards to double taxation if no exemption form is filled in for the country in which the ETF operates?

Lastly are ETFs all subject to currency risk or are some not by being hedged?

WS

Editor’s response: Thanks for your letters. As explained in Buying overseas stocks: A Eureka guide, you must fill in the W8-BEN form for any securities listed in the US to lower your withholding tax to 15% from 30% and to avoid paying tax on your entire sale proceeds.

Some ETFs protect against currency fluctuations by hedging themselves. They do this by entering into forward foreign exchange contracts to lock in a set exchange rate.

The Internal Revenue Service (IRS) provides instructions on how to fill in the form but, as Phil says, it doesn’t explicitly state how to do so for SMSFs. CommSec also has instructions with a sample W8-BEN form for SMSFs and trusts (see here).

Clarifying the top 10 returns

I have only just got around to read Scott Francis's article Dividend testing LICs and ETFs from the 28th of July.

The article is very interesting but not a correct comparison! If you had added franking credits to the ten blue-chips (as you did for the LICs and the ETF), the total value for the blue-chips would have been about 40 % higher. And for those of us with a SMSF in pension mode, that is the real income/return.

Bernt Genssen

Scott Francis’s response: Thanks very much for your letter - and a very good point around franking credits. The returns from the blue chip shares were initially calculated from the following article, and there is a second table that included the value of franking credits (see Our top 10 dividend cash cows).

As you say franking credits are crucial for SMSFs – and indeed all investors – for their role in either reducing tax or providing a tax refund.

Locating bond advisers

Alan Kohler has convinced us that we should have a balance of bonds in our SMSF portfolio, and suggested that we should go to a specialist bond adviser for advice. We are in Mackay, so how do we locate one?

IS

Rosemary Steinfort’s response: FIIG securities are based in Brisbane and offer a retail service to clients. They offer access to bonds that usually are only available to wholesale clients.  The minimum commitment is around $50,000 and this can be spread across five bonds. The major banks also provide a bond broker service for clients – but the minimum investment is closer to $100,000.

The other option is to buy a bond ETF that trades on the ASX which can be bought and sold like shares. The benefit of this is that it is more transparent and the costs are lower. See my article New indexing: strategies for bond ETF investors.

Automating administration for SMSFs

I've noticed that accounting firms are beginning to embrace a new level of automation in the quest to streamline the administration of their SMSF clients. This new automation takes the form of automatic retrieval of balance and transaction data across all SMSF related accounts for each client.

This data collection is carried out by a third party (e.g. BGL Australia), meaning that SMSF trustees are being asked to sign sweeping authorisations allowing unrelated companies to collect private financial data. These companies then make the data available to their nominated accountant.

I'm all for streamlining the accounting process, but allowing third party access to this extent strikes me as a step too far. I'd be interested to know what others think about these developments. Is this a step too far or is it an acceptable trade-off between privacy and efficiency?

Steve Murray

Updating STW’s recommendation

STW Communications (SGN) is a recent share recommendation of Eureka, which has dropped by 12.5% in two days! This is due to the board announcing "mediocre" guidance two days ago as to increases of profits over the next 12 months. Will you stay with this recommendation bearing in mind this "guidance" or do you recommend cutting losses at 12.5% (i.e. exercising a stop loss) and moving on to a potentially more profitable share purchase?

David Silk

Brendon Lau’s response: Thanks for your question. I will be issuing an update on Monday outlining my thoughts on the stock.