Tax Time Tips for ETF Investors

• To help with tax time, we’ve collated some commonly asked questions and helpful tips.
• Don’t forget to supply your TFN and email address to your ETF issuers unit registrar to receive timely communications.

Its everyone’s favourite time of year – tax time! We’ve collected a few helpful tips for exchange traded fund (ETF) investors.

What should Australian ETF investors expect this tax year compared with last?

The good news is that FY24 has been good to equity investments. The Australian share market has seen positive returns with the S&P / ASX 200 up 6.9% or up 11.0% including dividends for the financial year up to 3 June 2024. Although dividends over this last financial year have been lower in Australia due to a drag from the miners.

Investors in international investments have fared even better. The US stock market has seen double digit returns with the S&P 500 up 18.6% or 20.2% including dividends. Developed markets also performed well with the MSCI World index up 16.0% or 17.8% including dividends. Dividends from international investments have been stronger than the previous period.

In terms of sectors, the technology and financial sectors were standouts in Australia and globally with gains of more than 20% including dividends.

Most equity ETFs hold a broad portfolio of company shares that match an index. The SPDR® S&P®/ASX 200 Fund (ASX Code: STW) for example, holds around 200 Australian companies. The SPDR® S&P® World ex Australia Carbon Control Fund (ASX Code: WXOZ) on the other hand holds over 800 global companies. When companies in the portfolio pay higher dividends, that flows directly through to higher distributions by the ETF. In other words, ETFs simply “pass through” the dividends they receive.¹ As economic resilience, a strong labour market and a robust consumer resulted in better earnings, we saw higher dividends start to flow through for share market investors. We expect full year dividends for global portfolios to be 4-5% higher over this financial year than last financial year.² Dividends have been lower in the Australian share market with stronger dividends from the big banks offset by weaker dividends from the big miners.³

Many ETFs distribute their income more than once a year, and eagle eyed investors may have already noticed some significantly higher distribution payments from their international equity ETFs vs Australian equity ETFs.

Australian core bonds have delivered higher total returns for investors so far this financial year (to 3 June 2004) compared with last financial year, with government bond returns including distributions around 2.1% and composite returns around 2.8% (vs. 0.9% and 1.0% a year ago respectively). Coupon income earned by an ETF, which is generally fairly stable from year to year, is passed through to investors, and gains or losses through the year also have impact on the amount of distribution for the ETF.

Are dividends the only part of ETF distributions?

ETFs don’t only distribute income; they sometimes distribute capital gains. If you were managing a large portfolio containing hundreds of Australian or international shares, you would need to perform hundreds of tax calculations each year beyond just adding up the dividends. ETF issuers do these tax calculations “behind the scenes”, and then reflect the results in the year end distribution to investors. The most common additional item is capital gains. If an ETF has traded its shares during the year, to rebalance for example, it may have generated capital gains. The ETF doesn’t pay tax on those gains – it simply passes them on to the investor in the year end distribution.

Much like other investments, these gains can be discounted or undiscounted. For investors, the tax calculations involved from owning a single ETF are much more simple than the calculations required for a widely diversified share portfolio.

ETFs that hold investments other than shares may also have additional distributions to pay. Fixed income ETFs, for example, need to distribute any coupon payments or interest payments they have received from the portfolio. They may also have to distribute any profits they have made from trading bonds.

How will the recent market moves impact ETF distributions this year?

Capital gains inside an ETF typically occur where there has been a strong rise in share market prices, and where the index being tracked by the ETF requires rebalancing.

Many market capitalisation ETFs, like STW, track indices that don’t require much rebalancing and so rarely distribute much by way of realised gains. However, where the index has higher turnover, it is more common for the year end distribution to include realised capital gains.

Capital returns have been higher for most ETFs. This means that some ETFs may have realised gains to distribute. It can be hard to forecast realised gains for ETFs – take the example of resource ETFs. The demand from China and commodity price moves means that valuations of miners have come under pressure. But with turnover usually low for resource ETFs, the price falls in miners may not necessarily result in crystallisation of losses. Whether an ETF has realised gains or losses to distribute this year will depend on a few factors; how old the ETF is, which sectors or markets it holds, and whether the portfolio turnover is high or low.

In past years, we have had mixed reactions from investors when the distribution amount includes realised capital gains. Some investors appreciate the additional payments, while others would prefer it if the ETF wasn’t required to distribute these amounts. It is important to stress that distributions of realised capital gains don’t impact total returns. A distribution of realised gains increases the “Income” return of the ETF. However, the ETF price normally drops immediately after the distribution, and so the “Growth” return is reduced, leaving the total return unaffected.

What about franking?

Most Australian listed ETFs don’t pay tax – they just pass their income on to investors, and it is the investors who pay tax. The same is true for franking credits. Most Australian listed equity ETFs receive franking credits from the companies they hold, and they pass those credits on to investors at distribution time. Just like company shares, the franking credit doesn’t form part of the cash distribution – it is a tax credit that you may be able to use when you complete your tax return. Given some of the healthy dividends paid by miners and banks this year were fully franked, investors who have held Australian equity ETFs at each distribution point during the year ended 30 June 2023, will likely receive franking credits in their tax return.

ETF Tax Statement

If you own ETFs directly, you should receive a ETF tax statement after the end of financial year. This will have the capital gains, dividend, franking and other information that you will need for your tax return. If your investments are administered on a platform, the platform provider may provide you with a statement that summarises any capital gains, dividend, franking, and other information that you need for your tax return.

What are your top tips for a smooth EOFY?

Here are some of our favourite tips:

1. Make sure you have supplied your Tax File Number (TFN)! For SPDR investors you can check that by logging on to Link Market Services Investor Centre. Providing your TFN is important for two reasons. Firstly, you may not be paid the full distribution if you haven’t provided your TFN. If the issuer doesn’t have your TFN, they may be obliged to hold back some of your distribution and pay it to the Australian Taxation Office (ATO). You may be able to claim it back eventually, but it is usually easier to provide your TFN up front. Secondly, if the issuer has your TFN, most of the important tax information from your ETF investment will be passed automatically to the ATO, making it easy for you or your tax adviser to pull it into your tax return.
2. Make sure you have supplied an email address so you receive updates from your ETF issuer. For SPDR investors you can check that by logging on to Link Market Services Investor Centre. If the issuer has your contact details, they can easily alert you to any special considerations at tax time for your particular ETF holdings.
3. Be careful about frequent trading close to the distribution date. If your ETF holds Australian shares, and if you have traded close to the distribution date, you may not be able to use all the franking credits distributed. The rules governing franking credits are complex, especially the “45 day rule”, and you should speak to your tax adviser before trading close to the distribution date.
4. Keep records of your ETF trades. Like when you sell an investment property or a regular company share, selling an ETF on the ASX can result in capital gains tax. That means you need to keep records of your purchases and sales. This is something the issuer can’t help you with, because most trades are done on the ASX and the issuer is not directly involved. You will need to get transaction details from your share trading or brokerage account. The good news is that a single ETF can give exposure to hundreds of companies, but you only need to keep trading records on one ETF.
5. Don’t submit your tax return until you have received all your ETF tax statements. While you may know the cash distribution on 30 June, you won’t know some of the finer tax details linked to your ETF distributions until you receive your ETF tax statement. So it’s best to wait until you receive your statements for all your investments.
   

How can I find out more information?

Most issuers provide a guide to your tax statement. The SPDR ETFs 2024 tax guide will be available at the same time as your SPDR ETF tax statement.