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?
Having peaked at the start of the calendar year, share market prices have fallen around the world. The Australian share market has held up better than most, however at 31 May 2022 the S&P / ASX 200 price index remained 1.4% below where it began this financial year. But falling prices don’t necessarily mean falling income. Dividends over this last financial year have been significantly stronger than 2020/21, both in Australia and offshore.
Most equity ETFs hold a broad portfolio of company shares that match an index. The SPDR® S&P®/ASX 200 Fund (ASX Code: STW) for example, holds around 200 Australian companies. The SPDR® S&P® World ex Australia Carbon Control Fund (ASX Code: WXOZ) on the other hand holds approximately 1,000 overseas companies. When companies in the portfolio pay higher dividends, that flows directly through to higher distributions by the ETF. In other words, ETFs simply “pass through” the dividends they receive.1 As the economic rebound began in earnest in 2021, we saw higher dividends start to flow through for share market investors. We expect full year dividends for global portfolios to be 10-20% higher over this financial year than last financial year. Dividends have been even stronger in the Australian market with some large dividends from the big miners and better dividends from banks.
Many ETFs distribute their income more than once a year, and eagle eyed investors may have already noticed some significantly higher distribution payments from their equity ETFs.
Are dividends the only part of ETF distributions?
ETFs don’t only distribute income; they sometimes distribute capital gains. 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.
How will the recent market falls impact ETF distributions this year?
Capital gains inside an ETF typically occur where there has been a strong rise in share market prices, and where the index being tracked by the ETF requires rebalancing.
Many market capitalisation ETFs, like STW, track indices that don’t require much rebalancing and so rarely distribute much by way of realised gains. However, where the index has higher turnover, it is more common for the year end distribution to include realised capital gains.
While income from dividends may be higher than last year, don’t assume that the recent fall in share market prices will mean ETFs have no realised gains to distribute. Despite the falls this year, share market prices are generally still well above where they were, say, three years ago. Whether an ETF has realised gains to distribute this year will depend on a few factors; how old the ETF is, which sectors or markets it holds, and whether the portfolio turnover is high or low.
In past years, we have had mixed reactions from investors when the distribution amount includes realised capital gains. Some investors appreciate the additional payments, while others would prefer it if the ETF wasn’t required to distribute these amounts. It is important to stress that distributions of realised capital gains don’t impact total returns. A distribution of realised gains increases the “Income” return of the ETF. However, the ETF price normally drops immediately after the distribution, and so the “Growth” return is reduced, leaving the total return unaffected.
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. Given some of the healthy dividends paid by miners and banks this year were fully franked, investors who have held Australian equity ETFs at each distribution point during the year ended 30 June 2022, will likely receive franking credits in their tax return.
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 adviser to 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 2022 tax guide will be available at the same time as your SPDR ETF tax statement.
1Distributions may vary. The ability of the Funds to pay distributions depends on, among other things, the dividends and distributions declared and paid by the companies whose securities are held by the Funds. There can be no assurance that such securities will pay dividends or other distributions. Distributions may also be impacted by gains or losses from the sale of securities and by currency hedging profits or losses (for Funds where currency hedging is used).
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" or "State Street Global Advisors, ASL"). Registered office: Level 14, 420 George Street, Sydney, NSW 2000, Australia · Telephone: 612 9240-7600 · Web: www.ssga.com.
State Street Global Advisors, ASL 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 and target market determination, 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®, Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC, Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC, ASX® is a registered trademark of the ASX Operations Pty Ltd, these trademarks have been licensed for use by S&P Dow Jones Indices LLC and sub-licensed for use to State Street Global Advisors, ASL. MSCI indexes are the exclusive property of MSCI Inc. (“MSCI”). MSCI and the MSCI index names are service mark(s) of MSCI or its affiliates and have been licensed for use for certain purposes by State Street. 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.