Investing in U.S. shares from Australia? Keep in mind your tax obligations

CommSec CommSec

29 April 2021

Investing in U.S. shares can provide increased exposure to different companies, deeper markets and greater diversification.

We reported recently on some of the risks and benefits of international share trading which you can read here. In short, international equity offers more choice and the added exposure of a foreign currency.


This article will give you a brief idea of the tax issues to consider if you are an Australian tax resident and considering trading U.S. stocks.

What’s the situation?

Australian tax residents are subject to tax on their world income. This includes investment income (dividends) and capital gains from overseas investments. You can refer to the ATO website ‘Investing overseas for more details.

In order to prevent double taxation of the same income, Australia has entered into “tax treaties” with more than 40 jurisdictions, including the USA. The USA/Australia tax treaty can provide Australian tax residents with a reduced rate of tax on U.S. sourced income, such as dividend payments from equity holdings of US companies if certain conditions are satisfied. 

US companies are required to withhold and remit 30% of dividends to the US Internal Revenue Service, unless they have validly completed US tax forms from the investor that allow the company to reduce the rate to 15%. More detail is provided below.

When preparing your Australian income tax return, you may be able to claim any U.S. withholding tax that has been withheld from your dividend as a foreign income tax offset (FITO). FITOs may reduce the Australian Tax you would otherwise pay on foreign earnings. The FITO rules are complex (for instance, there are certain limits on claims), you should ensure you understand how these rules apply to you before determining that you will be able to claim a FITO. You should consult your accountant, tax advisor or the ATO for more information.  

When investing in the US, you should also consider other taxes that may apply, such as U.S. estate taxes. It’s important to check the IRS Website and/or with a U.S. tax professional whether your investments are impacted or give rise to an obligation. 

 

Which forms?

When buying or selling U.S. securities, a correctly completed US tax form needs to be completed (typically for individuals a W-8BEN-E is the relevant form).  Without the form the dividend payer must withhold and remit 30% of the dividend to the IRS. 

A W-8 form is required for each U.S. holding, however, the same form can be applied by CommSec to each US holding. A correctly completed form is valid for three years. However, there is a requirement to submit an updated form when any of your circumstances change (e.g. name or address).

It’s also important to understand that when you sell securities without a correctly completed and valid W-8 form, 30% of sale proceeds will be withheld and remitted to the Internal Revenue Service (IRS). With a correctly completed and valid W-8 form 0% of sale proceeds will be withheld.

Please refer to the Commsec website for more details on the W-8 form.

 

Eligibility

To benefit from the USA/Australia tax treaty you must be an Australian resident for tax purposes. If you are a resident for tax purposes of another country you will be subject to the tax treaty between the USA and the country you reside in. In the event there is no tax treaty, 30% of dividends will be withheld and remitted to the IRS. 

 

International trading with CommSec

  • Open a CommSec International Trading Account—CommSec gives you access to over 25 global share markets, including the New York Stock Exchange, the London Stock Exchange, and the Tokyo Stock Exchange.
  • Listed Investment Companies or Managed Funds that invest mostly in shares listed on overseas stock exchanges.

Finally, prior to investing in international securities, we recommend you obtain professional advice to evaluate whether it is appropriate to your particular financial circumstances. For further advice on U.S. tax implications please contact the IRS or your U.S. tax adviser.

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Important information

Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 (CommSec) is a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945.  CommSec is a Market Participant of ASX Limited and Cboe Australia Pty Limited (formerly CHI-X Australia Pty Limited), a Clearing Participant of ASX Clear Pty Limited and a Settlement Participant of ASX Settlement Pty Limited. Both entities are incorporated in Australia with limited liability.

This information is not advice and has been prepared without taking account of the objectives, financial or taxation situation or needs of any particular individual. Taxation considerations are general and based on present taxation laws and may be subject to change. For this reason, any individual should, before acting on this information, consider the appropriateness of the information, having regards to the individual's objectives, financial or taxation situation and needs, and, if necessary, seek appropriate professional advice.

Commonwealth Bank is also not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and you should seek tax advice from a registered tax agent or a registered tax (financial) adviser if you intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.

Trade execution, clearing, settlement and custody of international securities are provided by Pershing LLC, a subsidiary of the Bank of New York Mellon. When you open an International Trading Account with CommSec, you access international markets through Pershing LLC via the CommSec website or by calling the CommSec International Trading Desk.

 

 

Disclaimer

This site is directed and available to and for the benefit of Australian residents only. © Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 ("CommSec") is a wholly owned, but non guaranteed, subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 and both entities are incorporated in Australia with limited liability.

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