Understanding foreign income tax

Conduit foreign income (CFI) is foreign income that is ultimately received by a non-resident through one or more interposed Australian corporate tax entities.

Foreign income paid to a non-resident is ordinarily exempt from Australian tax. However, when paid as an unfranked distribution through a corporate tax entity, such a payment would usually be subject to non-resident withholding tax.

To rectify this anomaly, special rules allow CFI to flow through Australian corporate tax entities to non-resident investors without being taxed in Australia. For this to happen, the amount of unfranked income received by the Australian corporate tax entity must be disclosed as conduit foreign income and it must be paid to investors (ie not retained by the Australian corporate tax entity).

Where CFI is received by an interposed Australian corporate tax entity, that entity will treat the amount received as non-assessable non-exempt (NANE) income. This will be the case where the amount is disclosed as CFI and the interposed entity passes that income on to its investors as such income.

An Australian resident investor will include any CFI they receive as an unfranked dividend and be subject to tax in the same manner as other unfranked dividends.

Depending on the type of foreign income, foreign withholding taxes, typically between 10 per cent and 30 per cent, may apply. Income paid to the Cash Account/Cash Hub will be net of any foreign taxes withheld. Refer to Understanding EOFY reporting for more information.

For international listed securities:

• the cost of the investment is reported in Australian dollars referable to the acquisition settlement date.
• proceeds on disposal are reported in Australian dollars at the exchange rate referable to the disposal settlement date.
• Tax Reports won’t report on any foreign exchange gains or losses arising as a result of investments in foreign assets or foreign currency.

Investors should seek independent taxation advice in relation to the treatment of foreign exchange gains and losses. Refer to Understanding EOFY reporting for more information.

Certain Product Issuers may distribute FITOs on foreign capital gains as well as foreign source income. We report all FITOs distributed on foreign source income and foreign capital gains in the Tax Offsets section of the  Detailed Report in the Tax Report.

Where the Product Issuer provides a split of FITOs paid on foreign capital gains and foreign source income, we'll provide this information in the relevant columns. In reporting these amounts we make no determination about investors’ eligibility to claim FITOs.

Investors should always seek independent advice from their Tax Agent to determine their eligibility to claim FITOs.

A New Zealand (NZ) resident company can make a distribution which will have both Australian franking credits as well as New Zealand imputation credits attached to the payment.

Clients will need to reduce the amount of franking credits disclosed on the Tax Report – Summary by the amount of any Trans-Tasman Imputation credits received during the year.

This means that the Franking Credit amount disclosed on the Tax Report – Summary under Dividends and/or Trust Distributions needs to be reduced by any Trans-Tasman imputation credits disclosed as narration next to the company name on the Tax Report – Detailed. The narration indicates the dollar amount of Trans-Tasman credits distributed and the individual income tax return label reference. 

An NZ company must elect into the Trans-Tasman imputation system by notifying the Australian Taxation Office (ATO) of its election. The election will remain in force until the NZ resident company revokes this choice, or the ATO cancels the election.

For dual-listed securities that derive income in the United States of America (US), the US Internal Revenue Service (IRS) requires certain documentation from the ultimate beneficial owner to ensure the appropriate level of tax is withheld in the US. 

The W-8BEN form can be completed to establish that the investor is not a US person and that they are the beneficial owner of the income received. Where an investor is a resident for tax purposes of a country with which the US has negotiated a double tax agreement (DTA) with, in completing this form, the investor may be able to claim a reduced rate of, or exemption from, US withholding tax (US WHT).

For the lower withholding rate to apply, a W-8BEN form for individual investors or a W-8BEN-E form for entity investors must be completed in full and submitted before any income is paid or credited.

• News Corporation (NWS) and News Corporation Non Vote (NWSLV)¹
• RESMED (RMD)
• Vanguard All-World Ex-US Shares Index ETF (VEU)
• Vanguard US Total Market Shares Index ETF (VTS)
• Coronado Global Resources Inc (CRN)

At present we’re unable to facilitate access to reduced withholding tax treaty rates for any other securities or for securities held through an SMA.

Note: Superannuation and Pension clients fall under the trustee of Macquarie Investment Management Limited, and therefore clients do not need to submit a form as the forms are completed under trustee sign-off.

1. If you hold either or both NWS and NWSLV, only 1 W-8BEN form is required.

Investors are subject to a maximum withholding tax rate of 30% on certain income derived from US sources. Where the requisite form is completed, a withholding tax of 15% may apply for Australian tax residents who derive certain income sourced in the US, in accordance with the Australia/US Double Taxation Agreement (DTA).

Alternatively, where the relevant form is not completed in full or in part, DTA benefits will not apply, resulting in a standard 30% rate of withholding tax for Australian resident investors.

Generally, a current W-8BEN form will remain in effect until 31 December, three years after the date of signing. For example, a form signed on 15 March 2022 will remain in effect until 31 December 2025. However, if a change in circumstances makes any information on the form incorrect, a new W-8BEN form (or other appropriate form) must be filed to continue to claim a reduced rate of withholding tax under the DTA.