U.S. ETF Tax Refund Guide: Australian Investor
Do ETF Investments Require Tax Payment?
When U.S. stocks and ETFs distribute cash dividends, a certain amount of tax is withheld, known as withholding tax. Whether placing orders through overseas U.S. stock brokers or via domestic brokers under a re-commissioned arrangement,Buying U.S. stocks, stock ETFs, bond ETFs, etc., any cash dividends distributed are taxable.
Investors who are not tax residents of the United States are not required to pay capital gains tax levied by the U.S. If non-U.S. tax residents directly hold U.S. bonds, whether they are U.S. Treasury bonds, local government bonds, or corporate bonds, they are not required to pay tax on the interest. However, if U.S. bonds are held through bond funds or bond ETFs, then the interest distributed by these funds or ETFs is considered as dividends and should be taxed at the dividend tax rate.
As foreign investors (individuals and institutions), if you do not meet any of the following conditions, you are generally not considered a U.S. tax resident by the IRS.
The IRS generally considers individuals and entities that meet the following conditions as U.S. tax residents:
All U.S. citizens and green card holders.
Entities established or operated in the U.S.
Foreign nationals who legally reside in the U.S.:
Legal permanent residents holding a green card;
Individuals holding a valid non-immigrant visa, who meet the substantial presence test for residency (refer to IRS Publication 519, U.S. Tax Guide for Aliens)."
For the latest version of Publication 519, please refer to the guidance provided by the U.S. Internal Revenue Service: About Publication 519, U.S. Tax Guide for Aliens
Taking a bond ETF as an example, the 20+ Year U.S. Treasury Bond ETF by iShares (TLT)
Based on the type of investment income, taxes involved with TLT include:
Dividends: Dividends paid by TLT are generally considered ordinary income or may be considered qualified dividends, subject to dividend taxes.
Capital Gains: Selling TLT at a price higher than the purchase price will result in capital gains. The capital gains tax rate depends on the duration of the holding period.
Regarding dividend taxes, generally, the U.S. levies about a 30% tax on cash dividends originating from U.S. companies. However, this 30% dividend tax rate does not apply to countries that have tax treaties with the U.S. For instance, residents of the following countries and regions that have tax agreements with the U.S. have different dividend tax rates: Australia 15%, Canada 15%, China 10%, Japan 10%,New Zealand 15%, etc. When investors receive cash dividends from TLT, this portion of the tax is usually collected by the broker through a pre-deduction method, known as withholding tax.
However, the taxation of ETFs depends on the assets they hold. Since U.S. Treasury bonds are exempt from state and local taxes, the dividend payments from an ETF like TLT that holds U.S. Treasury bonds are also exempt from state and local income taxes. The portion pre-deducted by brokers at the time of distribution will be fully or partially refunded after confirmation at the beginning of the following year, once the previously withheld taxes are assessed. At the end of the document, you can learn how to view the details of the tax refund in Moomoo.
To more clearly explain the tax refund situation for ETFs, let's take TLT, the 20+ Year U.S. Treasury Bond ETF-iShares (TLT.US), as an example and discuss it in detail.
TLT Tax Refund Timing
Generally speaking, the tax refund occurs in the first quarter of the following year. Brokers recalculate based on documents from upstream tax authorities and then refund the corresponding tax amount. Taking Moomoo as an example, in 2021, Moomoo completed tax refunds in February, and the tax refund period in 2022 was between February and April. Investors should stay informed and plan their financial and tax affairs according to the latest schedule provided by upstream institutions. Please note that the refund date may vary depending on the actual processing progress of upstream institutions.
TLT Tax Refund Amount
For instance, with a full refund: David, a citizen of Australia, holds TLT. The ex-dividend date was August 1, 2022, and he received a dividend of $29.83 from TLT on August 5, 2022. With a 15% tax rate, Moomoo Securities withheld $4.47 as tax. On April 4, 2023, David received a full automatic refund of the $4.47 tax from Moomoo.
How to View Tax Refund Details in Moomoo
After you receive the refunded TLT dividend tax amount, you can view the details of the TLT tax refund amount in Moomoo by going to 'Capital Details' under 'Corporate Actions' — 'Dividend Distribution'.
Procedure: Click on the 'Account' Tab > Click on the 'More' Tab > Click on 'Capital Details' > Click on 'Filter' > Select 'Corporate Actions' — 'Dividend' > Click on the relevant stock's 'Dividend Distribution' > 'Dividend Distribution Detail', as shown in the following image.
More Information Related to Tax & ETFs
Tax Loss Harvesting with ETFs
Tax loss harvesting is a strategic approach used by savvy investors to improve the tax efficiency of their ETF investments. This technique involves selling securities that have experienced a loss and replacing them with similar ones, allowing investors to offset taxes on both gains and income. Understanding and implementing tax loss harvesting can significantly enhance an investor's tax position.
Franking Credits and ETF Investments
Franking credits are an integral part of the Australian tax system, especially pertinent to investments in Exchange-Traded Funds (ETFs). These credits are a form of tax credit that companies pass on to their shareholders along with dividends. Understanding how franking credits work and their impact on your tax obligations is crucial for any investor in Australian ETFs. Franking credits, also known as imputation credits, are essentially a way to prevent the double taxation of company profits. When an Australian company pays dividends to its shareholders, it has already paid corporate tax on its profits. These profits, when distributed as dividends, come with a tax credit attached - the franking credit. For shareholders, franking credits are valuable because they reduce the amount of income tax payable on the dividends.