Mastering the W-8 Form for Tax Efficiency

Bryce: [00:01:54] Welcome to get started investing in this podcast, we cover all the basics you need to start your investing journey. Are you joining us for the very first time? Is this the very start of your investing journey? Well, before you dive into this episode with us, our feed is designed to go from the very beginning. So we strongly recommend that you scroll up and start at episode one. However, if you're feeling brave and of course, don't let us stop you here at Get Started Investing feed, we unpack all the jargon and confusing bits. We hear your investing stories with the goal of making investing less intimidating. And of course, we want to have a good time along the way. My name is Bryce and as always, I'm joined by my equity buddy Ren. How are you going? 

Alec: [00:02:31] I'm very good. Bryce. I'm just really proud of the name of this episode. 

Bryce: [00:02:34] W8. Right?

Alec: [00:02:36] Is how can I avoid double taxation? I mean, if that didn't hook bill, then I give up. 

Bryce: [00:02:43] Yeah, it's it's very clever. If you have no idea what we're talking about, then you will understand what we're talking about. By the end of this episode, we're going to be talking all things the W eight will inform our taxation, 

Alec: [00:02:57] but we're going to talk all things taxation on international investments and how you can make sure you're not paying too much. Yes, because very important, the opportunity set wherever you're listening to this as an investor is global. And so we've got to build the skills to invest globally because otherwise we're stuck just investing in our local economy minus the. But in Australia, you do. You do miss some superstar names.

Bryce: [00:03:24] That's it. So before we crack into that small amount of housekeeping each year, we have a community survey and we use that to understand from you guys what you would like us to do more of what you'd like us to do less of. Understand who you are and how we can create content that will help you on your investing journey. We want to get better every year, and this is a great opportunity for us to hear directly from you. So there is a link in the show notes, as well as on our Instagram page and on Facebook. The survey. It's only going to take you 15 minutes and four for entering. You go in the prise to to win $500

Alec: [00:04:02] on the draw to win control 

Bryce: [00:04:04] Ghana. Yeah, yeah. Before completing the survey, you go in the draw to win $500, so we would really appreciate it. It gives us a great sense of our community who we're talking to and really helps all of our shows improve on the content that they work, that we're delivering to you. So we'd appreciate if you take 15 minutes to do that 

Alec: [00:04:23] now, any more housekeeping from you? That's it. No more like wedding updates or anything that you want to talk about. Oh yeah, shout out to institchu

Bryce: [00:04:31] could do a shout out to Institu, but not yet. 

Alec: [00:04:34] Okay, any any wedding sponsors come through for us. 

Bryce: [00:04:39] I'm open to it. 

Alec: [00:04:40] Okay. All right. Well, we'll we'll wait with bated breath for Bryce next wedding update. Yes, but look, the reason that we want us to do this episode was over summer, I was told I had to update my weight ben form, and I know the emails a few times. Then they'll like you have for days, otherwise you won't be able to invest overseas. And I was like, I should probably do it. And then it was super easy to do. So I thought one, it's a good reminder to just not procrastinate because a lot of the things that you should do are actually pretty easy. That's not even investing. That's just a life lesson. I actually, anyway, I will start talking about my life, but we thought it was be a good opportunity to invest, to talk about investing overseas, how that's taxed. But before we do, I guess a quick recap on investing overseas. 

Bryce: [00:05:31] Yeah, now we have gone through this in a bit of detail midway through last year on our global series. So for more detail on this, check those out. But look, how do we actually invest overseas? Traditionally, it has been difficult to invest overseas. When Ren and I first started, we didn't have all the amazing platforms and apps that make it so easy to invest nowadays. But because of these advances in technology and new entrants to market, it's becoming easier and easier to invest overseas. We've got access to the UK, we've got access to New Zealand, US, you name it.

Alec: [00:06:05] But but I think this is universal as well. Wherever you listening to this, you have platforms that allow you to invest globally. No platform that I could find anywhere in the world allows you to invest everywhere in the world. EToro, Robinhood, they're close, but interact. Interactive Brokers is close. But you know, like if I wanted to get into the like the Mongolian stock market, I don't know if any of them offer it. So no one can put their hand on their heart and say, We offer you everything, but we're getting pretty close. 

Bryce: [00:06:36] So then that begs the question Why would we invest overseas Ren and look where global consumers? So we should be global investors? There's no reason that if I'm engaging with Apple and Microsoft and Netflix and all these amazing companies overseas that I should only be investing if I'm here in Australia, in. Mining and CBI, if you're in America, no reason to look at our stock market or the UK stock market. 

Alec: [00:06:59] Well, I mean, I'm looking at podcast studio, I'm looking at a Sony camera and an Apple laptop and a road sound recorder. Sony Japanese Apple American Road. Good Australian company love. Yes, but like we, we are global consumers and we are global investors. And if you're not going to find a consumer electronics company on the ASX in Australia, that gets close to the quality of Apple. So why would you turn down the opportunity to invest in the best? Yeah. And that that holds true across every industry and every countries have specialities of different things. Why would you not jump there? Yeah, the US specialises in tech. 

Bryce: [00:07:41] Yeah, find me an iron ore producer better than Fortescue in the United States. 

Alec: [00:07:44] Yeah, well, there's four big ones and we have three of those to get out of here. Yeah. So, you know, Australia specialises in mining, I guess you could say. Yeah. Not quite as sexy, but hey, you can't build tech without men, without the minerals that go into it. The last thing is diversification. You know, your your job is tied to the country that you live in if you own your own home that's tied to the country that you live in. Why would you have all of your stock investments tied to the country that you live in as well? Any shock to your local economy could affect your job could affect the value of your house. Diversify your investments overseas to take that single source of risk away. So I think that's why we don't need to spend any more time on it. If you really want us to hear, if you want to hear us give you the hard sell on why investing overseas is important. Scroll up in this podcast. 

Bryce: [00:08:40] Similarly, what are your choices when investing overseas? We have Covid these choices in our global series, so if you want more detail on this, go back and listen. If you've just started welcome. There's three ways that you can invest overseas through a managed fund, through an index fund or an ETF, or you can directly invest in stocks through your broker overseas. Now, options one and two don't require the tax form that we're about to speak about, and that is because those investing options are usually domiciled. Or, in other words, their home is your home country. They are created and run in your home country 

Alec: [00:09:19] just because we're talking tax and we've got to be nit picky. Yeah, if the fund manager or the index fund or ETF is based in your home country, then you don't need to worry about it because the fund manager or the provider does it on your behalf. Yeah, if we sitting in Australia don't invest in an American fund, then we actually do have to worry about it. It's about where the investment is based. Beta fund, be it an individual stock, be in an ETF. That's the preamble about investing overseas. As we've mentioned a few times, we've done more content on investing overseas. But now I guess we wanted to get into the nitty gritty of how is it taxed? Because whenever we go, you know, on Instagram or anything and ask, you know, what questions do people have about international investing? It is a big one that comes up. So these principles are applicable wherever you are in the world. You know that there will be nuances for different countries, but basically if we start at the very beginning. What are the tax implications of investing overseas wherever you are in the world? There will be your home country will tax you on global income. So as Australian tax residents, wherever we earn money in the world, we must declare it on our Australian tax return and the Australian Tax Office will tax us on that. At the same time, if we earn income in a foreign country that may be subject to local tax, maybe, maybe. So if we are a investing in American American shares and American shares pay US dividends, American tax authorities may tax that, but then we have to report it in Australia, and that's part of our worldwide income, which creates them double tax, which creates the problem of double taxation. 

Bryce: [00:11:13] Yeah. That doesn't sound very fair. 

Alec: [00:11:15] No. How do we avoid that? But you know what? Americans who are American tax residents and have investments in Australia love our iron ore miners and so love the dividends that they pay. So they have the same problem because their Australian investments may be subject to Australian tax, and then they have to report to the IRS the global income. And so they also face a double tax problem as well. So our government's in the slow moving yet infinite wisdom have made treaties nice. 

Bryce: [00:11:52] Well, that's good. And so how does this actually transpire to me not getting double taxed? 

Alec: [00:11:58] So these treaties, these tax treaties basically allow you to stop getting taxed in the country that you've made the investment or that you're making the money and just allow you to get taxed where you're a resident. And that's what a a form or wait then form does. It basically is us as overseas investors telling the American tax authorities not to tax us because we have a treaty with you. So back off, back off for Australians, the ATO website sort of spells it out. If we're an Australian resident for tax purposes, which we are and we receive foreign income, our income may be taxed in both Australia and the country that we receive it. And if there's not a tax treaty, then the Australian Tax Office may give us a tax credit here at home. But we do have to pay the tax overseas. Whereas if there's a tax treaty with Australia, we can ask the tax authorities in that country to reduce their withholding tax or exempt it from us, us from it completely. And that's done by supplying a tax relief form or a certificate of residency. So the white been think of it is a tax relief as a tax relief form. Think of it as a way to tell America that, you know, Australia will tax us on it and you don't need to. Now, if we didn't fill out the white then form, yeah, and this is this isn't Australia's anywhere in the world. If we didn't fill it out, the US would take 30 percent of whatever we met. 

Bryce: [00:13:33] So it's just a higher tax rate that they hit you out. Yeah, withholding tax

Alec: [00:13:37] if we do fill out the form. And we sell a share and make money. We don't get taxed at all zero percent. Mm-Hmm. If we get paid a dividend, they still take 15 percent. 

Bryce: [00:13:48] Yeah, but annoying. Yeah, but look, it's better than 30 percent. 

Alec: [00:13:53] It's better than 30 percent. It's half of 30 percent. 

Bryce: [00:13:56] Yes. Yeah, exactly. So it's a little 

Alec: [00:13:59] bit confusing, but I think for me, the long and the short of it is as we invest internationally, there's the problem of double taxation. If we pay tax overseas, we may get tax credits at home or we can fill out a form like the white. And just not worry about paying most of that tax overseas and just get taxed on at home. 

Bryce: [00:14:18] So Ren, it's it sounds all a little bit overwhelming and confusing having to keep up with, you know, if I'm investing in in the UK, if I'm investing in New Zealand, if I'm investing in the US and they all have different tax rules and different tax treaties with Australia. And what's your experience with this? Is it enough to stop you investing overseas now? 

Alec: [00:14:41] The great thing is, whatever broker you with that will be worrying about the details for you. Yes. So, you know, like you fill out this form through a broker and then the second thing that you all have to do if you invest overseas is just keep good records. Because when you fill out an Australian tax return and I'm sure it's the same when you're filling out a tax return wherever you live, you just have to make sure you're outlining how much like foreign income you own and stuff like that. And then the tax office will do a lot of the work for you. Yeah. So keep good records and fill out the white form. And really, that's all you have to 

Bryce: [00:15:19] to worry about. Yeah. Well, you barely even have to worry. I mean, I know that Stake is part of their sign up process, a broker that allows you to invest directly into the US. They fill out the form digitally on your behalf, so it's just all part of the process. You. To be honest, you wouldn't even know it's there. Okay, that's cool. Yeah. And then and then they'll send you, I think, well, the reason you've had to redo it is because it only lasts a particular amount of time. Three years. Yeah. So I'm assuming then steak would then just give you a reminder at three years that we need to redo it. Have your details changed? Oh, good, let's keep going. And and how arduous was your order?

Alec: [00:15:55] It was so easy, like the reason that I didn't do it because I was like, Oh, this is going to be like a paper form and like, it really wasn't. It was put your most basic details in like your name and your address. Yeah, and it was like an online Google for I wasn't a Google phone, but it was similar, you know? Yeah. Honestly, the American Tax Office might be more efficient if I run off Google. But yeah, it was like an online form. It took literally two minutes. Yeah. Now I did a bit of research before this episode. It's not. That experience isn't universal, so steak and I j making it easy online. There are some brokers that still make you print out paper and either then fill it out, sign it and then scan it and email it or actually mail it back. 

Bryce: [00:16:43] Well, we hate paperwork. 

Alec: [00:16:43] Do we want to name and shame? 

Bryce: [00:16:45] Yes, because we hate paperwork. CommSec great. Get out of here

Alec: [00:16:49] comes from get sorted out. Get a Google 

Bryce: [00:16:51] sorted out category or form. Yeah. So look, I think my key takeaway that could all sound pretty overwhelming and a bit confusing having to understand tax laws and tax rules. But at the end of the day, as we've seen, a lot of the brokers really help you understand this and do it on your behalf. But it should not be something that puts you off investing internationally. 

Alec: [00:17:13] So we went we went out to our Instagram audience to ask what questions they had, and we'll answer some of those in this. In the second part of this episode, including I actually went into my tax return and looked through how you record some of this stuff, so I'll reveal how much foreign dividend income I earned last year. Nice. 

Alec: [00:18:18] So Bryce, as I said before the break, as part of this episode, we went out to our Instagram audience and asked if they had any questions about investing internationally and how that's taxed and how we have to manage it as retail investors. We've got a few questions. We got a fair few questions that came back. So. So the first question we got was how do you recognise international investments on an Australian tax return? And for our non-Australian listeners, this principle probably apply, but this won't be super relevant, but it's worth answering. So how do I do it?

Bryce: [00:18:53] Well, you mentioned it probably five minutes ago. There is a section on our on our tax return that is for foreign source income and foreign assets or property as part of our Australian tax return. And so it's pretty clear that's where are you going to put in information about dividends, capital gains that you may have sold stock and Ren. You had a bit of a cliff-hanger for us.

Alec: [00:19:16] Yeah, I actually pulled my tax return from last year and had a look. So yeah, as you said, there's that section where you fill out your foreign income, section 20 actually people applying along at home. So I actually had a look at how much foreign sourced income I made. Yeah, five hundred and fifty six dollars nice all in dividends 

Bryce: [00:19:36] or in 

Alec: [00:19:36] USD. Yeah, yeah. So that's you actually don't have to split it out by country. You just say what your foreign source income was. Yeah, okay. I know. So you convert everything to us aid. Yeah, yeah. Yeah, there's a managed fund section as well where it asks for any foreign income you earned. But then importantly, there's a you attach a capital gains schedule the options there that it basically goes like, what capital gains did you make on shares in companies listed on the ASX in Australia? And then what other capital gains did you make on shares? And then it's like, what capital gains did you make on real estate situated in Australia? And then what capital gains did you make on other real estate? And so like the other, for each of those categories, it's also the same for unit trusts is overseas. 

Bryce: [00:20:25] Yeah, yeah, 

Alec: [00:20:26] that's that's how you do it. There's specific sections where you put your international income and your international capital gains, but I think the most important thing is if you have a complex tax situation, well, to be honest, if you have a tax situation, full stop, go and get professional help. Yeah, it'll be worth it in terms of the tax size of the tax return. And for me, I, we actually use the accounting we use for Equity Mates to do our personal returns. And it was super easy.

Bryce: [00:20:56] Yeah, it's worth it. 

Alec: [00:20:59] Yeah, and the cost of a tax professional is tax deductible. Yeah, yeah. The following year. Is it the following year? Yeah, I didn't know that. Yeah, good to know because

Bryce: [00:21:08] you've probably done it in the next tax year. 

Alec: [00:21:12] You make a great point.

Bryce: [00:21:15] So anyway, let's keep moving through. Do I need to complete this form if I invest in exchange traded funds? 

Alec: [00:21:21] Not if they are listed in your home country. Yeah, yeah. So if we are based in Australia and we invest in an ETF that is listed on the Australian Stock Exchange, even if it invests in overseas companies, the fund manager deals with that. The tax admin for us and we just have an Australian ETF that we report on.

Bryce: [00:21:44] Yeah, that's it. Straightforward. So Ren to close out, we've got some quick fire non-tax related but international investing related questions that have come in from our community on Instagram. So hopefully we've been able to answer the tax side of things. If you have more questions, feel free to hit us up. There's so much to understand, but also go and speak to a professional because it is all specific to your personal situation. But here are some others from around, from a more generally focussed on international investing. So Ren first one, how do you deal with currency risk and do you wait for the exchange rate to get better before investing in US shares?

Alec: [00:22:24] So there is no perfect answer to this question because it's your own investment decisions and we can only talk about what we how we approach it ourselves. But basically, well, the way I approach it is the exchange rates move every day, but over the long term, they sit in a pretty standard range. You know, the Australian dollar to US dollar generally trades around like 70 to 80 cents, and there have been times in our life when that's gone to either extreme just after the global financial crisis. The Australian dollar reached the same as the US dollar. It was like one to one, and at different times, the Australian dollar has got really weak against the US dollar. It's got, you know, it was trading at like 50 cents in the early 2000s. So there are times when it goes to either extreme, but generally it sits in a pretty standard range. And so for May, unless it's hitting one of those extremes, I don't worry about exchange rates. 

Bryce: [00:23:25] Yeah, maybe 

Alec: [00:23:26] if we hit parity again and one Aussie dollar buys one US dollar, maybe that's the time to say US stocks to go because my Australian dollar is really strong. And so you put more in. But I think over the long term, the exchange rate isn't the thing that's going to determine your return. The performance of the companies themselves is what's going to determine the return. 

Bryce: [00:23:48] So next one, what is the best app for investing overseas or investing in general? 

Alec: [00:23:54] Well, you love getting this question, so 

Bryce: [00:23:56] you answer that one. There's no one best up, and I think that there might not ever be. Maybe if we build one, but there is no one best app. It really all depends on what you want, and we've done plenty of content around this. But I think what is important to remember is that brokerage is becoming cheaper and cheaper across the board and is now becoming more of a commodity. So then if you're if your brokerage is cheap, you need to start looking at what else you're looking for in an app. What access does it give you? Like what markets? If you're looking for New Zealand in the US markets and there are brokers that do that? You know what sort of resources and information do they? Are they going to provide you with what sort of support all those sorts of things? Yeah, you need to consider. 

Alec: [00:24:37] Even like simple things like the user experience, like if it's not intuitive and it puts you off investing, then it's not the right broker for you. That's it. But yeah, I agree. For me, it's about access and about cost. So for for my personal decision, all I care about is what is it giving me access to and how much do I have to pay for that access? Yeah, there's plenty of names out there. I don't think we need to list any because the advertising literally everywhere, all the time, they have massive advertising budgets, so people are probably familiar with the 

Bryce: [00:25:06] way advertisements 

Alec: [00:25:10] don't let perfection be the enemy of the good. It's really easy to switch. It's really easy to have multiple brokerage accounts, so don't let it put you off. 

Bryce: [00:25:20] Yes. So to my first one, do we get us or foreign dividends the same way we get Australian dividends? And I think this is referring to being paid out. 

Alec: [00:25:29] Yeah, but long in the short of it. Yeah, like you get it in paid into your brokerage account in the same way that Australian dividends do. There are some nuances like the ability to do a dividend reinvestment plan isn't really there for most overseas stocks, but in terms of actually getting the cash, there's no extra hoops you have to jump through.

Bryce: [00:25:49] And you mentioned this at the top of the show Ren. But the final one is there a broker that allows me to invest in every country? 

Alec: [00:25:57] No, but it's getting close. Well, at least not as far as I'm aware. Yeah, maybe, but probably not. 

Bryce: [00:26:06] Great answer. Yeah, yeah. Yeah. So no, maybe we're not sure they're getting close, but they're getting there. 

Alec: [00:26:11] But. Find me an investor that 

Bryce: [00:26:13] Iraqi Iraq, you know, well, are we talking like all public markets here

Alec: [00:26:18] or what? What I was going to say was find me an investor that wants to invest in every country and I'll find you an investor that has too much money. Yes, because seriously, like this, one hundred and ninety six countries in the world, maybe more. No one should have one hundred and ninety six positions in their portfolio. 

Bryce: [00:26:34] What is it? Well, there even 196 individual public listed like exchanges. 

Alec: [00:26:39] Well, some exchanges. Some countries have multiple exchanges. 

Bryce: [00:26:44] Yeah. But like, would would Fiji have an exchange? Yeah, you're right. 

Alec: [00:26:48] 100 percent. OK, I'm going to Google that right now. Let's not close this episode out until I 

Bryce: [00:26:52] while Ren is Googling. That does bring us to the end of the episode. So a massive thank you for sticking with us and also for joining us if it is your first time. A reminder it would be great if you could fill out the Survey Community Survey. The link will be in the show notes or on our Instagram page. And yeah, it's been an enjoyable start to the year. If you have any questions that you'd like us to cover on, Get Started Investing feed would like to join us on the show to talk about some barriers and hurdles that you're facing, then hit us up at Contact@equitymates.com. And if you could write and review as well, that always goes a long way to help other people find the Get Started Investing feed community. So Ren, what is the answer? Does Fiji have its own so desolate?

Alec: [00:27:39] The South Pacific Stock Exchange is a stock exchange based in Suva, Fiji. I don't believe any Australian brokers give you access to that now, but if one of them wanted to give access and then wanted to send us to Fiji to speak to some of Fiji's best companies, how are you? 

Bryce: [00:27:58] Where are you from and where open? But that brings us to the end of the episode. Ren. As always, it's been great, and we'll pick it up next week. Sounds good.