Everything you wanted to know about ETFs and tax but were too afraid to ask

When will I get my tax statement?

This year’s tax statements will be dispatched on 26 July 2024.

Every year in July, tax statements are made available to investors in all VanEck’s funds that have paid a distribution in respect of the previous financial year. This includes the distribution paid for 30 June, though the proceeds will be received in the new financial year.

The details for all funds paying on 30 June is:

Your details must be up to date with our registrar, Link Market Services’ Investor Centre to receive the tax statement without any delay.

If you need to check whether Link has all your details, you can also contact them directly on 1300 68 38 37 between 8.30am and 5.30pm weekdays (AEST/AEDT).

I’ve lost my tax statement, can I get another one?

Tax statements are made available online via Link Market Services’ Investor Centre.

The tax statements for the 2023-24 financial year will be available after 26 July 2024. Previous year’s statements are also available via Link Market Services’ Investor Centre.

You can also request to receive your tax statement by post via Link Market Services’ Investor Centre or by calling 1300 68 38 37 between 8.30am and 5.30pm weekdays (AEST/AEDT).

If I reinvest my dividend, do I have to pay tax?

Your ETF’s distributions will be subject to tax, regardless of whether you take it in cash, or participate in a dividend reinvestment plan (DRP).

If you participate in a DRP, keep the records of each distribution because you will need them if and when you sell your units. These statements will help you calculate your capital gain/loss because this must be calculated for each parcel of units you have bought, including those you received as part of a DRP.

Do I get franking credits from ETFs?

Yes.

When an Australian company pays tax to the Australian Tax Office (ATO) it can attach franking credits to its dividends. Investors who receive the dividends who are an Australian resident, then get the tax credited to them against their Australian tax liability. If they don’t have a tax liability, the ATO will refund the franking credits to them.

When an ETF holds shares that pay franked dividends, the franking credits flow through to investors to reduce their tax liability. The level of franking credits that flow out of an ETF depends on its underlying shares portfolio. An ETF that includes Australian companies that attached franking credits to its dividends will pass those credits onto the investors.

Why does my income include capital gains?

ETFs don’t only distribute the income they receive, they sometimes distribute capital gains. This is because throughout the year the ETF has bought and sold securities. These sales may have generated capital gains. The ETF doesn’t pay tax on those gains, it passes them on to the investor.

Much like other investments, these gains can be discounted or undiscounted.

One of the benefits of ETFs is that 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 and the capital gains from sales. We do this work for you. You only have to calculate the capital gain on your ETF units.

For investors, the tax calculations involved in owning a single ETF are much simpler than the calculations required owning lots of shares individually in a portfolio.

Why is the amount on my tax statement different from what I received?

This has to do with the AMIT (Attribution Managed Investment Trust) tax laws and it is described on the ATO’s website here, but we don’t think it is easy to understand. 

To begin, many concepts go together here, this is complex. So we will attempt to explain this in simpler words and will explain the calculation at the end.

Let’s start with what a cost base is. When you sell an asset your capital gain is calculated as the proceeds of the sale minus the cost base. So, the cost base is whatever number it is appropriate to deduct to get the right answer for the capital gain. The capital gain may be ‘discounted’ by 50% if the asset has been held for 12 months or longer.

It is easier to explain (and understand) a cost base considering a rental property rather than an investment. The cost base of a rental property is all the capital costs incurred during the acquisition and sale of the property. That is, all the expenses that cannot be claimed as a tax deduction. The cost base can start before you even own the property. There may be legal expenses and other things that you spend money on before you become the property owner. Then you add the cost of the property and all the acquisition costs such as stamp duty. After you become the property owner, you may add things like a garage. All the costs involved in that are added to the cost base. So, the cost base is a number that is being adjusted from time to time whenever it needs to be.

Maybe the company who built the garage did a bad job and they may later refund part of the money you paid them. That refunded amount would be deducted from the cost base. Therefore, cost bases can go up and can go down.

The legal costs and such that are incurred in selling the rental property are also added to the cost base. There could be costs incurred after you cease being the property owner. Maybe the garage infringed on the neighbour’s property, and you paid them some damages a few years later. That payment would be added to the cost base, and if you’ve already lodged the tax return with the capital gain in it, you would have to amend that tax return.

When it comes to shares, the cost base is simpler. People generally calculate the cash they received on sale minus the amount of cash paid on acquisition and they get the right answer. The calculation is (the number of shares sold multiplied by the sale price) minus (the cost of the shares when they were bought) minus (the brokerage on sale) minus (the brokerage on acquisition).

However, sometimes a company returns capital to its shareholders, rather than paying a dividend. The return of capital is not taxable as a dividend. Instead, it reduces the shareholder’s cost base. Otherwise, the calculation of the capital gain on sale would not reflect the true profit that the shareholder made. The reduction in the cost base happens when the return of capital is made, but it doesn’t have any real impact until the shares are sold. The return of capital will have been a certain number of cents per share and each individual share has its cost base reduced by that amount. However, you get the same answer if you treat the shares as a single asset and deduct (the cash received as a capital return) from (the total cost base). This is what most people do.

ETF units, such as the VanEck ones you hold, are like shares, but there are some crucial differences. This is because the ETF is a trust rather than a company. With company dividends, the taxable amount is whatever the shareholder receives.

ETFs can’t work the same way as companies because ETFs and other trusts don’t have to pay tax themselves. The dividend paid by an ETF is passing on untaxed profits. The Government does not let the profits go untaxed just because the ETF chooses not to pay a dividend. Therefore, the system is that whatever profits the ETF makes are automatically “attributed” to the unitholders, whether the ETF pays a dividend or not. That is what the Attribution Managed investment trust Member Annual (AMMA) tax statement you receive does. It is telling you what part of the ETF’s profit has been automatically attributed to you and you are required to put these numbers in your tax return. The numbers on the AMMA statement will be the same no matter what amount of dividend is paid by the ETF or whether the ETF pays any dividend at all.

The ETF dividend isn’t taxable, it is the attribution on the AMMA statement that is taxable. Company dividends are the passing on of post-tax profits whereas ETF dividends are the passing on of pre-tax profits.

To get the right capital gain calculation on the sale of ETF units any difference between the dividends paid, and the taxable numbers on the AMMA statements needs to be accounted for. When implementing this system, the Government chose to connect these adjustments to the capital gain calculation by adding them to or subtracting them from the cost base. It’s a convenient way of expressing these adjustments in the legislation and of keeping track of them.

So, the amount shown on page 4 of your AMMA statement as an increase or decrease in your cost base is just the difference between the taxable amounts on the AMMA statement and the amount of cash you received as a dividend. It’s not really a ‘benefit’. It’s just ensuring that when you finally sell the ETF units, the amount of capital gain will be calculated to accurately reflect the true profit on your investment.

The actual arithmetic is that these ETF cost base adjustments are deemed to happen on the last day of the financial year to which the AMMA statement relates. So, this year they are deemed to have happened on 30 June 2024. If you later sell off the ETF units, across a number of future financial years, you will need to apportion the cost base adjustment on this year’s AMMA statement across the ETF units that you held on 30 June 2024. If you sell them all in the same financial year, you will get the same answer by just treating the holding as a single asset, and adjusting by the dollar amount shown on the AMMA statement.

As investors tend to hold ETF units for many years, their cost base is likely to go up in some years and down in others. What we say to investors is to hold on to the AMMA statements until you sell and then you will be able to aggregate all of the adjustments in the year in which you sell. That will give you the right answer.

Phew….

Happy financial new year…