Many Australian investors are familiar with the local tax regime but less clear on the tax implications of investing internationally.

In Australia, 40% of investors hold direct Australian equities. For any income earned, we pay tax. For any capital gains when we dispose of an asset, we pay tax.

The system is relatively simple, and most investors are familiar with how they file their taxes and what is owed.

In recent years, barriers such as accessibility and cost to trade internationally have been lowered.

The local market’s concentration on two sectors – financial services and resources, have encouraged investors to look elsewhere.

The tech fever that hit Australian investors during 2020 encouraged more investors to look overseas.

These investments have brought with them an unfamiliar taxation structure and process.

Complicating this situation is that taxes in the origin country may be withheld, and sometimes exchange rates must be considered for declaration.

Here are some general rules for how tax may work with foreign investments.

The company is taxed at a corporate level


In almost every jurisdiction, companies will have to pay a corporate tax rate on any income earned.

As a reminder, these investments are not included under the dividend imputation system.

This means no franking credits, and the corporate tax paid cannot be offset or recouped.

You’ve received a dividend


In the eyes of the ATO, any investment income you earn in or out of the country must be taxed. In most cases, the country you’re investing in will also require the investment to be taxed.

In the US, this is done automatically through withholding tax of 15%. Not all countries withhold tax. The United Kingdom is one example.

To limit double taxation, investors are given a foreign tax offset in the case where there’s withholding tax from the investment’s country of origin. This can be claimed as a credit against the Australian tax payable on foreign income if you are an individual investor or investing through a trust.

This scenario may play out differently if you are investing through a company account.

Withholding tax leakage occurs when your company covers the corporate tax rate on foreign investments. For example, in the US, the corporate tax rate is 21%. In Australia, it is 25%. When you receive your tax offset, 4% is held back to make up the difference.

Income that is then distributed to individuals from your company account does not receive any withholding tax credit.

To understand how to structure your investments to maximise your return, it is best to speak to a tax professional that understands your individual circumstances.

You’re selling your investment


If the time comes to sell out of your investments, this may trigger capital gains tax. Capital gains tax on international investments are taxed the same as Australian investments.

You still receive a CGT discount on assets that are held for more than 12 months, and the remaining gain is added to your assessable income for the year.

Some countries where you’ve invested may have a capital gains tax or equivalent. If you have paid this tax overseas, you may be eligible for an offset.

Currency considerations


Every part of your tax return must be filed in Australian dollars. When you’re declaring income from international investments, two rates must be used depending on the circumstance.

    1. You’re receiving the income into Australia:
      The exchange rate at the date you received the dividend

    2. You’re keeping the dividend in an international account:
      The exchange rate at the end of financial year is used.

The following episode goes into more detail about the role currency plays in global investing. 

Expenses associated with your foreign income


Much like expenses associated with earning Australian income, expenses associated with your foreign investment income may be claimed.

There are some general exclusions to the rule, including if your expenses outweigh the income you generated. You may not claim the excess in the same financial year.

For specifics on what is eligible, consult a tax professional.

Investing internationally through managed funds or ETFs


One of the reasons that you pay management fees on funds and ETFs is, well – for them to be managed.

The general rules of taxation that have been discussed above still apply to these vehicles, but it is a simplified process at tax time. You do not need to declare the income and capital gains from each asset contained within the investment.

Investors will receive an Attribution MIT (managed investment trust) annual statement that will declare all investment income, any capital gains that have occurred, and any foreign tax offset within three months after the end of financial year.

We cover other considerations of buying ETFs listed on global exchanges in the following episode of Investing Compass. 

Why bother?

Adding international investments to your portfolio increases the complexity, the administrative burden and they are sans franking. With the Stage 3 tax cuts coming into effect on 1 July 2024, domestic investments become even more appealing. The tax cuts mean that the median income sits at a 30% tax rate. Most incomes – between $45,001 and $135,000 - sit in the 30% tax rate.

Fully franked dividends provide a 30% tax credit.

Math wasn’t my forte in high school, but even I don’t need a calculator to subtract 30% from 30%.

That is a dividend which requires a payment of 0% in personal income tax.

No investment decisions should be based on how much tax you can save, however, total returns matter for investors – including how much tax you pay.

So - why bother with international investments?

There are compelling reasons as to why you should consider international investing. And passive investors who are looking to gain access to the whole share market should consider that Australia is a small piece of the overall share market. 

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