Fund Domicile and Tax Drag

Question

Do some (or all) ETFs which are domiciled in Australia but hold non-Australian assets have tax drag? For example, since IVV holds US assets, does that result in tax drag for us Australians? How about FTSE, NDQ, IJP and pretty much any other ETF on the ASX which holds assets outside of Australia? Is there a list I can refer to which states which ETFs have tax drag and which don't? I'm aiming for global exposure, but of course hoping to avoid unnecessary taxes.

Answer

Hi Clara, great question.

The good news is that any fund which is domiciled in Australia operates under Aussie tax laws.  So when trying to figure this out, it’s best to go to the specific ETF provider’s website and look at the ETF info page and it should say on there somewhere whether the fund is domiciled in Australia.

If it is, that means the fund is essentially run from here and simply invests directly in shares overseas.  That’ll mean no tax drag.  But take a fund like VTS, which we can invest in from Australia, even though it is domiciled in the US.  Basically, this fund is operated from America and that creates some tax complications.  The tax friendly alternative for that would likely be IVV.

So my understanding is where the fund is operated from is the primary driver of the tax implications.  But it can also occur if the ETF invests in other ETFs which are listed (like DHHF by Betashares invests in VTI for its US exposure).

The following article has an explainer on how it works, and lists a couple of comparisons (though far from all): https://passiveinvestingaustralia.com/fund-do...

Options which are Aussie domiciled and not subject to tax drag are things like: VGS for global developed markets.  VGE for emerging markets.  IVV for US only.  BGBL for global developed markets.  So there are plenty of options and this whole ‘tax drag’ thing doesn’t apply to many funds, and even when it does the difference isn’t much.

I don’t know everything about the topic, but hope that helps.
Dave

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