As we approach the middle of June, many investors may be in the midst of tax planning.
If you've bought shares in the US or another foreign market during the year, you may need to account for them on your tax return. Here's a quick rundown of some differences between accounting for Australian shares and international shares.
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Dividends
Australian investors are required to pay tax on dividends received. These are taxed at their marginal rate.
One advantage of receiving dividends from Australian shares is that they often come with franking credits attached. Companies that have already paid corporate income tax on profits generated in Australia offer fully or partially franked dividends. For example, Telstra Group Ltd (ASX: TLS) offers a fully franked dividend. Meanwhile, Macquarie Group Ltd (ASX: MQG) offers a partially franked dividend.
Companies with extensive international operations may pay unfranked dividends. For example, CSL Ltd (ASX: CSL), which earns most of its revenue overseas, pays unfranked dividends.
In contrast, international companies (particularly US-listed companies) typically pay much lower dividends. Instead, they use a greater share of their profits for share buybacks or internal growth opportunities. For example, Berkshire Hathaway (NYSE: BRK.B) has never paid a dividend. Meanwhile, Alphabet Inc (NASDAQ: GOOG) pays a small dividend, which it only initiated last year.
Another point to remember is that dividends on international shares are often taxed by foreign governments. This is called withholding tax. In the case of the US, a 15% tax applies. However, there is a tax treaty between the US and Australia, which allows Australian tax residents to recover this tax via a credit on their tax return. Australian residents are then required to pay the difference between the 15% rate and the investor's marginal tax rate. This avoids double taxation.
Capital gains
Capital gains on international shares are treated nearly the same as those for Australian shares. When they are sold for profit, investors must pay a tax. Only realised profits are taxed; there is currently no tax on unrealised profits. You may have heard about the proposed super tax on unrealised gains. But for now, let's stick with the general rules and those that apply this financial year to all investors.
When tax planning, it's also worth remembering that investors receive a 50% discount on the capital gains tax if they hold the shares for more than one year. This provides another incentive to invest for the long haul.
Investors can also offset capital gains with capital losses. Notably, capital losses can only offset capital gains, and cannot offset dividend income, rental income, or wages. However, if capital losses exceed capital gains, they can also be brought forward and used to offset capital gains in future years.
One key difference in calculating capital gains on international shares is the exchange rate. If you've made a gain on the difference in the exchange rate between the price of buying and selling the shares, you'll need to pay tax on this too.
