ETF LICs vs VAS - Taxation for non resident

Hey guys,

I'll have some funds to invest in shares tomorrow, LIC or VAS. Eventually I'll move to Europe and live on dividends. From the taxation point of view, do LICs have any advantage over VAS (being 100% franked as opposed to 80% franked)?

Thanks

 

Depends where you are moving to:

Some countries tax dividends from listed companies at a discount rate compared to distributions from an ETF like VAS.

Depending on the detail in the tax agreement between your tax residency country and Australia, franking credits may or may not be recognized and credit given.

 

Thanks for that info. I'm moving to Montenegro, there are no tax agreements, so far. Would this mean there's no difference whether I buy lic or vas?

 

This might be of interest
Tax Tip 322: Comparison of Dividends Paid to Resident v Non-Resident Tax Tip 322: Comparison of Dividends Paid to Resident v Non-Resident

 

Thanks Terry. Any chance you would be able to compare 2 scenarios, non resident in both:

1. 2M in LICs, 4% net dividend yield, fully franked
2. 2M in VAS, 4% net div yield, 80% franked

 

no chance.

 

You really need to see an accountant who knows this stuff inside out. This is a tricky area.

Would you be purely living off dividends from Australia? Why? Why LICs? What about currency risk?

 

You can read the Australian Tax implications on the ATO website here:

Investment income and royalties paid to foreign residents

According to this information the ATO would tax like this:
Scenario 1: No Australian tax = $80k net
Scenario 2: 20% unfranked will be taxed at 30% = $75200 net

Can't comment on how Montenegro would tax this.

 

Hi @mtat , that is correct, I'd be living purely on dividends from Australian lic's.

Currency risk is something that will affect me hence i considered investing in European companies/infices. There was an interesting one one suggested by @FredBear , EXSH. However I found that lic's provide higher dividend income which would compensate for currency risk.

@FredBear and @mtat , are you aware of any European funds/indices with yields comparable to Australian lic's?

 

What will your safe withdrawal rate be?

 

The withdrawal rate will be all the dividends I receive, whatever that is at the time. I'm hoping this would be close to 4%, but if not - I'm happy with that because the costs of living are way lower over there (~50% lower). I won't be selling shares.

 

LICs are franked and not taxed where there is a non-resident. Franking is lost. Unfranked income is subject to 15% withholding tax. Any CGT event is also exempt

ETFs are a trust and distribute elements of income and each varies. For a non-resident :
1. Interest etc - Subject to withholding by registry 10%
2. Franked income - Exempt, lost franking occurs
3. Unfranked income subject to 15% withholding by registry
4. Foreign income. Exempt.. Tax credits ignored
5. CGT income amounts - exempt
6. CGT on sale. Exempt
7. AMIT tax deferred amounts. Of no effect since no CGT (see 6) occurs

Non-residents could also be exposed to issues if tax laws change.

A non-resident who fails to quote their TFN could also face withholding by the registry that will not be credited or repaid. Take care with that.

Of course a foreign investor needs to consider the variance in FX from time to time as this may affect asset value and income

 

There is no tax treaty with Montenegro (yet), so withholding tax will be 30%, according to the ATO:

You and your shares 2020

"It is deducted at a rate of 30% unless you are a resident of a country with which Australia has entered into a tax treaty that varies the amount of withholding tax that can be levied on dividends."

For residents of those countries with a tax agreement the rate is generally 15%.

 

I've found it difficult to find LICs in Europe with a comparable yield. LICs do exist, the big ones that are similar in concept to Australian LICs that you might want to check out further are:
Exor Spa - listed in Milan
Wendel Sa - listed in Paris
Investor AB - listed in Stockholm
Industrivärden AB - listed in Stockholm

I've left out the UK ones, with Brexit they are no longer on my radar.

My conclusion is that Australian LICs do give a better net return, keeping in mind the taxes paid to Australia and potential exchange rate gains/losses. However as a resident of a Euro country it would make sense to have some of your investments in Europe.

 

So to summarise...

• Huge currency risk
• No franking credits
• 30% withholding tax
• Tax-inefficient
  
• Manager risk
• Idiosyncratic risk (everything invested in Australia)
• No diversification (AUI is what, 50 stocks?)
  
• Reliance on arbitrary things like "dividend growth"
• etc...

But as they say, the best strategy/portfolio is the one you stick with.

 

Thanks mate. Please see my comments above. Makes sense ?

 

Yield is an arbitrary number. It for sure does not compensate for currency risk.

So is your withdrawal rate going to be 2% then? What will you do if the dividends don't cover your spending?

I misread the posts above. But how will this income be taxed in Montenegro?

Survivorship bias. Doesn't say anything about the next 50 years.

Are you sure? Diversification costs peanuts nowadays. I guess it's been a while since the Japanese bubble burst.

Survivorship bias again, but good on them. AUI might be my favourite LIC (but I don't invest in any, not anymore).


As nice as it is to receive dividends... there is NO DIFFERENCE between $1 received in the form of a dividend, and $1 received from selling some shares. Looking away from focusing purely on dividends and diversifying globally might result in a more reliable, long-term outcome.

Only trying to help!

 

Couldn't you add VGS for global diversification, it may reduce your dividend yield from Australian shares down to 2-3% but then you can sell/drawdown 1-2% of your growth shares to make up the 4% withdrawal rate.

You still achieve the same result but you're much more diversified and less exposed to currency risk?

What would the yield be on a 50/50 VAS/VGS portfolio.. assuming 2.5% from VGS and 4% for VAS (excluding franking credits in this case) an average of 3.25%? At 40/60 it might be closer to 4%?

So you get close to your 4% yield without selling shares, but being MUCH more diversified.

Unless I've totally messed up the math.

 

As an alternative to VGS, what about WAM Global (WGB) if you prefer LICs over ETFs? This will give global diversification, with 100% franking so no tax to pay to Australia as a non-resident. Avoids the messy income elements of an ETF.

Would a bond fund e.g. VBND be a worthwhile component in this case?

 

@Realist35 completely forgot about this article, you must definitely read it and all the links there as well: Non-residents or not planning on retiring to Australia - Passive Investing Australia

You should also post your situation and plans here: Bogleheads forum. They have a lot of members knowledgeable about investments and moving to other countries.