Tax time can be a daunting task that we all put off. To help, we’ve collated some commonly asked questions and turned these into helpful tips.
Don’t forget to supply your TFN and email address to your ETF issuers unit registrar to smooth the process and receive timely communications.
Its everyone’s favourite time of year – tax time! We’ve collected a few helpful tips for exchange traded fund (ETF) investors.
What should Australian ETF investors expect this tax year compared with last?
You should expect generally lower distributions from ETFs that hold Australian or international shares.
Most equity ETFs hold a broad portfolio of company shares that match an index. The SPDR S&P/ASX 200 Fund (STW) for example, holds around 200 Australian companies. The SPDR S&P World ex Australia Fund (WXOZ) on the other hand holds over 1,500 overseas companies. When companies in the portfolio pay lower dividends, that flows directly through to lower distributions by the ETF. In other words, ETFs simply “pass through” the dividends they receive. We have seen significant cuts in dividends for many companies in both Australia and overseas in light of the COVID-19 crisis. For Australian companies you need look no further than the big banks, retailers and some resource companies to find high profile dividend cuts and cancellations in the first half of 2020. Depending on the index it is tracking, we would expect ETF distributions to drop by 10% to 30% this year compared to last year due to lower dividends.
Mind you, that is not all a bad thing. Many companies who have cancelled or deferred dividends have done so to protect their balance sheet and their long-term viability. It is unwise to pay a dividend when you don’t have the earnings to support it. Furthermore, while income is important, investors should never lose sight of total returns. A higher dividend today means a lower price tomorrow; a lower dividend today means a higher price tomorrow. ETF prices normally drop immediately following a distribution. The silver lining to lower ETF distributions is that the immediate drop in ETF prices due to the distribution will be smaller than if a large distribution was made.
What about franking?
Most Australian listed ETFs don’t pay tax – they just pass their income on to investors, and it is the investors who pay tax. The same is true for franking credits. Most Australian listed equity ETFs receive franking credits from the companies they hold, and they pass those credits on to investors at distribution time. Just like company shares, the franking credit doesn’t form part of the cash distribution – it is a tax credit that you may be able to use when you complete your tax return.
Are dividends the only part of ETF distributions?
If you were managing a large portfolio containing hundreds of Australian or international shares, you would need to perform hundreds of tax calculations each year beyond just adding up the dividends. ETF issuers do these tax calculations “behind the scenes”, and then reflect the results in the year end distribution to investors. The most common additional item is capital gains. If an ETF has traded its shares during the year, to rebalance for example, it may have generated capital gains. The ETF doesn’t pay tax on those gains – it simply passes them on to the investor in the year end distribution. Much like other investments, these gains can be discounted or undiscounted. For investors, the tax calculations involved from owning a single ETF are much more simple than the calculations required for a widely diversified share portfolio.
ETFs that hold investments other than shares may also have additional distributions to pay. Fixed income ETFs, for example, need to distribute any coupon payments or interest payments they have received from the portfolio. They may also have to distribute any profits they have made from trading bonds.
What are your top tips for a smooth EOFY?
Here are some of our favourite tips:
Make sure you have supplied your Tax File Number (TFN)! For SPDR investors you can check that by logging on to Link Market Services Investor Centre. Providing your TFN is important for two reasons. Firstly, you may not be paid the full distribution if you haven’t provided your TFN. If the issuer doesn’t have your TFN, they may be obliged to hold back some of your distribution and pay it to the Australian Taxation Office (ATO). You may be able to claim it back eventually, but it is usually easier to provide your TFN up front. Secondly, if the issuer has your TFN, most of the important tax information from your ETF investment will be passed automatically to the ATO, making it easy for you or your tax adviserto pull it into your tax return.
Make sure you have supplied an email address so you receive updates from your ETF issuer. For SPDR investors you can check that by logging on to Link Market Services Investor Centre. If the issuer has your contact details, they can easily alert you to any special considerations at tax time for your particular ETF holdings.
Be careful about frequent trading close to the distribution date. If your ETF holds Australian shares, and if you have traded close to the distribution date, you may not be able to use all the franking credits distributed. The rules governing franking credits are complex, especially the “45 day rule”, and you should speak to your tax adviser before trading close to the distribution date.
Keep good records of your ETF trades. Just like when you sell an investment property or a regular company share, selling an ETF on the ASX can result in capital gains tax. That means you need to keep good records of your purchases and sales. Unfortunately, this is something the issuer can’t help you with, because most trades are done on the ASX and the issuer is not directly involved. You will need to get transaction details from your share trading or brokerage account. The good news is that a single ETF can give exposure to hundreds of companies, but you only need to keep trading records on one ETF.
Don’t submit your tax return until you have received all your ETF tax statements. While you may know the cash distribution on 30 June, you won’t know some of the finer tax details linked to your ETF distributions until you receive your ETF tax statement. So it’s best to wait until you receive your statements for all your investments.
How can I find out more information? Most issuers provide a guide to your tax statement. The SPDR ETFs 2020 tax guide will be available at the same time as your SPDR ETF tax statement.
SSGA Australia is not licensed to give tax advice and the information represented in this material does not constitute legal, tax, or investment advice. Investors should consult their legal, tax, and financial advisors before making any financial decisions.
Issued by State Street Global Advisors, Australia Services Limited (AFSL Number 274900, ABN 16 108 671 441) ("SSGA, ASL"). Registered office: Level 14, 420 George Street, Sydney, NSW 2000, Australia · Telephone: 612 9240-7600 · Web: www.ssga.com.
State Street Global Advisors, Australia Services Limited (ASL) (AFSL Number 274900, ABN 16 108 671 441) is the issuer of interests and the Responsible Entity for the ETFs which are Australian registered managed investment schemes quoted on the AQUA market of the ASX or listed on the ASX. This material is general information only and does not take into account your individual objectives, financial situation or needs and you should consider whether it is appropriate for you. You should seek professional advice and consider the product disclosure document, available at www.ssga.com/au, before deciding whether to acquire or continue to hold units in an ETF. This material should not be considered a solicitation to buy or sell a security. ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETF's net asset value. ETFs typically invest by sampling an index, holding a range of securities that, in the aggregate, approximates the full index in terms of key risk factors and other characteristics. This may cause the fund to experience tracking errors relative to performance of the index. Investing involves risk including the risk of loss of principal. Diversification does not ensure a profit or guarantee against loss. Holdings and sectors shown are as of the date indicated and are subject to change. This information should not be considered a recommendation to invest in a particular sector or to buy or sell any security shown. It is not known whether the sectors or securities shown will be profitable in the future. Sector ETF products are also subject to sector risk and non-diversification risk, which generally results in greater price fluctuations than the overall market. SPDR and Standard & Poor's® S&P® indices are trademarks of Standard & Poor's Financial Services LLC and have been licensed for use by State Street Corporation. The Dow Jones Global Select Real Estate Securities Index is a product of S&P Dow Jones Indices LLC and has been licensed for use by State Street Global Advisors, ASL. MSCI indices, the property of MSCI, Inc. ("MSCI"), and ASX®, a registered trademark of ASX Operations Pty Limited, have been licensed for use by State Street Global Advisors, ASL. SPDR products are not sponsored, endorsed, sold or promoted by any of these entities and none of these entities bear any liability with respect to the ETFs or make any representation, warranty or condition regarding the advisability of buying, selling or holding units in the ETFs issued by State Street Global Advisors, ASL. State Street Global Advisors Trust Company (ARBN 619 273 817) is the trustee of, and the issuer of interests in, the SPDR® S&P 500® ETF Trust, an ETF registered with the United States Securities and Exchange Commission under the Investment Company Act of 1940 and principally listed and traded on NYSE Arca, Inc. under the symbol "SPY". State Street Global Advisors, ASL is the AQUA Product Issuer for the CHESS Depositary Interests (or "CDIs") which have been created over units in SPY and are quoted on the AQUA market of the ASX. The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without State Street Global Advisors, ASL's express written consent.