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How to invest in US shares and ETFs directly via an SMSF

Self-managed super funds have often been criticised for lacking diversification when it comes to their investments, specifically that SMSFs have too much in Australian shares and cash and not enough in international investments.

This criticism is somewhat unwarranted as SMSFs access international investments via Australian managed funds and ETFs.  Research from Class Super shows that the underlying exposure to international equities across the top 20 managed funds and ETFs is 57% and 58% respectively (Source: Class SMSF Benchmark Report June 2016).

A large portion of SMSF trustees desire access to international investments, namely the US as the largest financial market in the world, however investing directly has traditionally been a costly and complex exercise. Trustees face a mountain of paperwork, complex forms and typically expensive trading fees.

Looking at trading fees, the cost to an SMSF to purchase AUD $10,000 of US stocks will be anywhere from $41 to $134  ($88 on average) per trade if conducted via the international broking solutions of the big four banks (Nabtrade, Commsec, ANZ Share Investing, Westpac Online).  

These amounts includes both the advertised broking fees rate (as low as $19.95) plus the foreign exchange fees to change your Australian dollars to US dollars.  

 

Best way to buy US shares and ETFs with an SMSF

So how does an SMSF cost-effectively buy shares in US companies like Facebook, Amazon, Microsoft, Google and Berkshire Hathaway?

The best solution we’ve found is Stake.

Stake is a local Australian start-up making US stocks and ETFs incredibly accessible for all investors – including SMSFs, trusts, companies and individuals. Stake’s model is simple: $0 brokerage on trading US shares and ETFs, $0 ongoing account fees and 0.70% to transfer monies between your AUD bank account the USD trading account.

 

 

How does Stake work for SMSFs?

Setting up an account with Stake is a breeze – we’ve done it! The set up is completely online – there is no paperwork to sign. All the identification and 100 point IDs checks are completed electronically.  

In addition, Stake also takes care of the W8-BEN-E form.  This form is a behemoth, and it you don’t complete one, you or your SMSF will be faced with increased US withholding tax on dividends from the stocks and ETFs you invest in.

The first thing that happens when you complete an online application with Stake is that they set you up a Macquarie cash account which acts as your Australian ‘wallet’.  Next they will set you up an account with DriveWealth which you access via the Stake web app.

DriveWealth is a US regulated broker-dealer and (via ICBC US) acts as the custodian of the US shares you purchase via your Stake account. Your cash and securities are insured for up to USD$500,000 with the SIPC.

The entire application process takes 5-10 minutes.  Once funds have cleared into the Macquarie account, you can transfer monies to the US dollar broking account.  Stake uses OFX to effect the transfer of monies from Australian to US dollars and this is where they charge their 0.70% fee – i.e. $70 per $10,000.  Once monies have been moved into the US broker account, there is no further cost to purchase US stocks and ETFs.

The entire process typically takes less than a week, and most of that time is waiting 1-3 days for funds to transfer into the Macquarie account and the same again for OFX to move the cash to your US dollar trading account.

 

How are US dividends taxed for an SMSF?

The typically US withholding tax rate for non-US residents is 30%. Under the Australia / US double tax agreement, this rate is reduced to 15% – provided a W8-BEN-E form is completed by the SMSF (which happens automatically with Stake).

For an SMSF in accumulation phase, income tax is paid at the rate of 15%, so typically there income tax on dividends on US shares and ETFs will be completely offset by the 15% US withholding tax.

For an SMSF (completely) in pension phase, income tax is nil, therefore the excess foreign income tax credits are  written off – i.e. they are not refundable the same way as franking credits on Australian company dividends are.

For an SMSF partly in pension and partly accumulation phase, the foreign tax credit will be a pro-rata offset based on the taxable amount of the foreign income and any surplus foreign tax credits will be written off.

 

How does capital gains tax work for an SMSF investing in US shares and ETFs?

Australian tax residents and entities (including SMSFs) have to pay capital gains tax on all worldwide investments including any gains on US shares.

SMSFs fall under the non-resident alien category of investment where the only business they have in the US are passive investments held with a US dollar-denominated brokerage firm. This would apply to an SMSF investing in US stocks or ETFs via Stake.

Where an SMSF holds a US investment for more than 12 months, they are eligible for the general CGT discount of 1/3 which effectively reduces the rate of tax on capital gains for an SMSF in accumulation phase from 15% down to 10%.

 

Does an SMSF pay tax on foreign currency exchange gains when moving cash USD to AUD?

It depends.  Where a foreign transaction account has a balance of less than $250,000 AUD equivalent, any realised forex gains are disregarded.  This is typically the default treatment for most trading accounts including the US brokerage accounts utilised via Stake.

For accounts that maintain a larger cash balance above $250,000 there will be tax payable on any realised forex gains (for example if your SMSF brings cash from USD back to AUD).  The taxable income will be calculated via the first-in-first-out (FIFO) method.

The is a complex area and it is recommended SMSF trustees seek competent taxation advice in regards to their specific situation. The ATO also has more information on their website here.

 

Are US shares held in the name of the SMSF?

Yes. Investments are registered in the same name as your trading account and your SMSF is the beneficial owner. With Stake DriveWealth manages the books and records and the shares are held in custody at ICBC Financial Services (the US arm of one of the world’s largest banks).

 

 

How to set up an US trading account for your SMSF

To get an account set up with Stake to enable your SMSF to invest directly in US stocks and ETFs, you can visit their website here: www.stake.com.au

There is also a very good Help Centre available here: https://stakeshop.freshdesk.com/support/home

 

Disclaimer:

The above information does not constitute personal advice and should not be relied upon as such because:

       a. This information has been prepared without taking into account your objectives, financial situation or needs; 

      b. You should therefore consider the appropriateness of this information in light of your own financial situation, objectives and needs before acting on this information; and

      c. Where this information relates to the acquisition, or possible acquisition of a particular financial product, you should obtain a Product Disclosure Statement (PDS) from the product issuer before making any decision about whether to acquire the product.

 

None of the information provided takes into account your personal objectives, financial situation or needs. You must determine whether the information above is appropriate in terms of your particular circumstances.

For personal advice that does take account of your particular objectives, financial situation or needs, you should consider engaging with an Australian Financial Services licensee (or representative) before making a financial decision.

 

 

Kris Kitto
Kris Kitto
Relationship Manager | Executive Director

I really enjoy the opportunity to collaborate with other professionals, especially those who are pushing some boundaries and delivering their services in a new and fresh way. I truly believe that for us to move our industry forward, we need to focus on what COULD BE rather just accepting what we have in the present. That ideal of not being constrained by history, and looking to the future, is a big part of what I bring into our business and also the businesses of professionals I work with.

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