Investors have been warned that possessing shares in exchange-traded funds (ETFs) is treated differently to owning “normal” shares in a company.
ETFs have become very popular in Australia and around the world as a way mum-and-dad investors can hold a diversified portfolio without making the stock picking decisions themselves.
CPA Australia tax policy adviser Elinor Kasapidis told The Motley Fool that holding ETF shares might feel the same as company shares, but the tax office won’t see it that way.
“This is because ETFs are treated like trusts — not companies — for tax purposes and there are specific rules that apply.”
The income received from an ETF is not a straight-forward dividend, according to Kasapidis.
“Because the underlying portfolio of the ETF is actively managed, the income received from ETF investments is made up of items such as distributions, capital gains, franking credits and foreign tax credits from Australian and overseas investments,” she said.
“This can increase the complexity of your tax return.”
UNSW associate professor Dale Boccabella said that the underlying investments are purchased on behalf of the eventual investor, which complicates the tax implications.
“The investor, under trust law, is the beneficiary. The short answer is that it’s a managed fund. Even if [the management of the ETF] is all automated, it doesn’t change anything.”
AMIT might help though
There is some relief in that back in 2016, a tax regime called Attribution Managed Investment Trust (AMIT) came into place.
This streamlined the taxation of distributions to trust investors.
ETFs that participate in AMIT will calculate the numbers on your behalf for you to plug into your tax return.
“Investors will receive a member annual statement which provides a breakdown of their income from the ETF for tax purposes,” said Kasapidis.
But it is optional for each trust and ETF to participate in the regime. So specific advice must be sought for the particular funds you’re invested in.
If your ETF doesn’t do AMIT, investors will have to go through the “present entitlement” model on their tax return.
“The very old trust [tax] regime is a pain in the neck,” said Boccabella.
“There’s no other way to put it.”
Man who said buy Kogan shares at $3.63 says buy these 3 ASX stocks now
When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*
In this FREE STOCK REPORT, Scott just revealed what he believes are the 3 ASX stocks for the post COVID world that investors should buy right now while they still can. These stocks are trading at dirt-cheap prices and Scott thinks these could really go gangbusters as we move into ‘the new normal’.
Find out the names of our 3 Post COVID Stocks – For FREE!
*Returns as of 6/8/2020
More reading
- Costa share price in focus following half year results
- Why I like the Vicinity Centres share price today
- 2 top ASX tech shares to buy and hold beyond 2025
- Buy Coles and this quality ASX dividend share for income
- Pilbara Minerals share price on watch as losses increase 243%
Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
The post How ETFs can be a nightmare at tax time appeared first on Motley Fool Australia.
from Motley Fool Australia https://ift.tt/3b1LcLo
Leave a Reply