Tax treatment of buying and selling ETFs

The ATO has released new guidance on the tax treatment of buying and selling exchange-traded funds (ETFs).

In broad terms, ETFs are managed (investment) funds that trade on the ASX or another registered exchange. Generally, when you invest in an ETF, you are purchasing units in a trust/fund which owns the underlying investments, rather than owning the underlying assets directly.

Taxpayers are required to declare in their tax returns:

• Income from distributions from ETFs
• Income from ETFs that have been reinvested into a distribution reinvestment plan (DRP)
• Capital gains or losses from the disposal of any ETF units

ETF distributions are essentially trust distributions that represent a share of the income of the fund. Depending on the assets held by the ETF, the income can be comprised of different types of income including interest, dividends, franking credits and capital gains and which need to be separately disclosed in the tax return at the correct labels.

Generally, Australian ETFs will provide an annual ETF tax statement that will notify taxpayers of the breakdown of their distributions and how to disclose the amounts in their tax returns. However, foreign-owned ETFs may not provide investors with a similar statement, so clients will need to use their own records to correctly calculate and disclose the foreign income in their tax return.

Many ETFs offer DRPs to investors, where instead of receiving a cash distribution, the investor has the option to re-invest the distribution in order to purchase additional units in the ETF. The ATO has clarified that the distribution income is assessable in that year, irrespective of whether it was reinvested or if they received a cash distribution. This is because general trust income rules apply to ETF. That is, trust distributions are assessable in the income year they relate to, and not the year they are paid.