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News.com.au
13 hours ago
- Business
- News.com.au
Why buying ETFs feels easy, until the tax man comes knocking
ETFs aren't as simple at tax time You must report all income, even if reinvested AMMA statements are essential for getting tax right For most Aussie investors, ETFs feel like the ultimate set-and-forget play. Buy a few low-cost funds, reinvest the returns, and let compound interest do the heavy lifting. Too easy, right? Well… not quite. Because when it comes to tax time, the ATO doesn't care how chill your strategy is. If you own ETFs, there's a good chance your return is more complicated than you think. What the ATO says Let's start with the basics. The ATO classifies ETFs as managed investment trusts, meaning you're not buying assets directly, you're buying units in a trust that holds the assets for you. That trust collects income and passes it on to you in the form of distributions. These distributions can include all sorts of income: dividends, interest, capital gains, even foreign income. And yep, you have to declare all of it, even if you never actually see the cash. That includes when your distribution is reinvested into more ETF units (via DRPs or dividend reinvestment plans), or when the ETF holds some of it back for fees and reserves. The ATO expects you to declare any income attributed to you in the year it's earned, not when it hits your bank account. They also expect you to report capital gains when you sell your ETF units, just like shares. And if your ETF sells assets inside the fund, they can pass those capital gains onto you, even if you didn't touch a thing. And that is where most DIY investors get blindsided. 'You're probably underreporting your tax' According to chartered accountant Davie Mach, that's one of the biggest traps ETF investors fall into. 'If you invest in ETFs and you're not across how it works, how capital gains are attributed, or what to do with foreign tax offsets, you're probably underreporting your tax,' he said on his podcast. 'And with the ATO cracking down harder on ETF investors, that's a risk you can't afford to take.' Mach breaks it down: most Aussie ETFs operate under the AMIT (Attribution Managed Investment Trust) regime, meaning they attribute income to investors whether or not it's paid in full. So if the ETF says you earned $100, but they only paid you $90, you still have to report the full $100 on your tax return. The good news is that $10 difference increases your cost base, which decreases your capital gains tax when you eventually sell. ETF providers send out AMMA statements. In other words, your end-of-year tax roadmap showing how much income was attributed to you, including franking credits, foreign income, offsets and capital gains. These numbers go into very specific boxes on your return. If you miss one, or worse, just report what landed in your bank account, you're probably getting it wrong. 'Don't ignore your ETF tax statements' Tax agent Irene Zhu has seen that mistake too many times. 'The biggest mistake I see, especially from beginners, is this – they completely ignore their ETF tax statements,' Zhu said on her podcast. 'They don't know what it means. They don't use them. And when tax time rolls around, they just enter whatever cash hit their bank account.' She also warns about foreign ETFs. If you've got US-listed ETFs in your portfolio, the IRS may have already taken a slice before your money arrives. You might be eligible to claim that back through a foreign income tax offset. But again, only if you report it correctly. A few simple fixes that could save you thousands Both Zhu and Mach agree on a few key rules of thumb for ETF investors: Wait for your tax statement. Don't lodge early just because you want it done. Your ETF's AMMA statement usually lands around August and has all the info you need. Use prefill, but don't blindly trust it. Cross-check it with your statement. Track your cost base. That's your running total of what you paid and all the adjustments over time. If you're not updating it, your capital gains tax could be way off when you sell. Be careful buying ETFs near the end of the financial year. You might cop a capital gains distribution you weren't expecting. So... ETFs might seem like the low-maintenance option, but from a tax perspective, they're anything but. 'Taxes are one of those quiet wealth killers. You don't notice at first, but over time, they can eat a big chunk of your returns,'' said Zhu. Read the fine print, track your numbers, and remember, when it comes to ETFs, the ATO's watching, even if you aren't.
Yahoo
07-06-2025
- Business
- Yahoo
Investing £5k of savings can generate a passive income of…
Buying dividend shares is a rapid and simple way to start earning a passive income. As with every investment, there are risks involved. But such threats can be managed through prudent decision-making and portfolio diversification. And when done well, the subsequent income stream can be quite lucrative, especially in the long run. So let's say an investor has £5,000 of capital sitting in a savings account. How much passive income can this money generate overnight and over the long term? The amount generated depends on which dividend stocks an investor decides to buy. Most tend to stick with simple index tracker funds. And right now, the FTSE 100 index offers a respectable 3.4% yield. That means, overnight, a £5,000 could generate a passive income of £170 a year. Obviously, that's not a groundbreaking sum, especially since many savings accounts offer similar returns right now at much lower levels of risk. However, there's also capital gains to take into consideration. And when combined with the dividend yield, the FTSE 100's historically generated close to an 8% annualised return for investors. Let's assume this trend continues over the next decade. What does this mean for an investor's passive income if they decide to reinvest any dividends between now and 2035? Without any additional capital, the original £5,000 will have grown to around £11,100. And if the yield's still 3.4%, that means the passive income stream will reach £377.40. That's a notable improvement. But what if we can do even better? Instead of relying on an index fund, investors can take matters into their own hands and invest in individual stocks directly. And right now, there are plenty of FTSE 100 constituents offering significantly higher yields. Take Aviva (LSE:AV.) as an example to consider. Today, the insurance giant already offers a more impressive payout with a 5.9% yield. So a £5,000 investment would instantly unlock an annual passive income of £295. But those who hopped on the bandwagon just five years ago are already earning considerably more. Following the appointment of CEO Dame Amanda Blanc in 2020, the company has undergone a significant transformation. It divested its non-core business ventures, raising over £8bn while simultaneously streamlining operations. Pairing this increase in efficiency with boosted activity within the annuity market, courtesy of higher interest rates, shareholders have been immensely rewarded. The Aviva share price has more than doubled, turning a £5,000 investment into £10,400. And at the same time, dividends were hiked by an average of 18% a year, turning an already substantial 5.3% yield at the time into a 12.2% payout. As such, a £5,000 initial investment in 2019 is now generating a passive income of £1,268.80. Sadly, Aviva shares aren't guaranteed to replicate this success between now and 2030. The company's still attempting to digest its £3.7bn acquisition of Direct Line Group. And with the UK government flirting with new mandates to force pension funds to invest more in UK assets, compliance-related costs of evolving regulation could create new headaches that impede performance. Nevertheless, Aviva serves as a good example of how stock picking opens the door to potentially superior returns in the long run. The post Investing £5k of savings can generate a passive income of… appeared first on The Motley Fool UK. More reading 5 Stocks For Trying To Build Wealth After 50 One Top Growth Stock from the Motley Fool Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors. Motley Fool UK 2025
