How to avoid additional tax when you buy overseas shares?
Tax When You Buy Overseas Shares
You can join a global trading platform and within seconds you own a share of Apple, Google or Tesla. But what are the tax implications?
If you get this wrong, you will end up with a lot more tax to pay, also called withholding tax leakage.
So let’s say that you buy $1m worth of Tesla shares – either as an individual, trust or company – and that they pay you a $100,000 dividend. Just dreaming.
So let’s start with you having bought the shares as an individual
Individual
You are entitled to $100,000 of dividends. This is your income.
But the dividends are subject to a withholding tax of 15%, so you receive $85,000 in your Australian bank account.
In your individual tax return you include income of $100,000. At the top marginal tax rate of 45% your tax liability is $45,000.
But you already paid $15,000 withholding tax. And so you receive an offset for this money. Meaning you don’t have to pay it again.
And so you pay $30,000 in Australian tax. With the withholding tax you paid this gives you an effective tax rate of 45%.
Trust
If you bought the shares through your family trust, the same applies. If the trust distributes the $85,000 to you, you recognise the $100,000 as income plus a foreign income tax offset (‘FITO’) of $15,000.
As before your tax liability at the top marginal tax rate is $45,000. Less the FITO you pay $30,000 in top up tax in Australia, giving you a 45% effective tax rate.
Company
As before, the $85,000 arrive in your company’s bank account. The company recognises income of $100,000 and so has a tax liability of $25,000 at a company tax rate of 25%.
But the company receives a FITO for the withholding tax, and so the company only pays $10,000 in top up tax and still has $75,000 in the bank
And so all is well. Until the company wants to distribute the $75,000 to you. Now you run into issues.
Because you only get a franking credit for the Australian tax your company paid, but not for the withholding tax.
And so the dividend of $75,000 only arrives with a franking credit of $10,000, not $25,000.
So you recognise income of $85,000. At a marginal tax rate of 45%, the tax liability is $38,250. But you have a $10,000 franking credit, so you only pay $28,250. So in total you paid $15,000 withholding tax plus $10,000 corporate tax plus $28,250 individual tax = $53,250, giving you an effective tax rate of 54.25%.
So when you buy overseas shares through a company, you pay almost 10% more tax on overseas dividends than if you had received those as an individual or through a family trust.
Does this make sense? Please give me a call if you get stuck.
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Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.
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