ETF distributions – Answers to your 8 most frequently asked questions | BetaShares

ETF distributions – Answers to your 8 most frequently asked questions

BY betashares | 15 July 2020
Share
ETFs paying distributions – Answering the 8 most frequently asked questions on distributions

At the beginning of each financial year, we typically receive many questions around distributions paid by ETFs. With the 19/20 financial year just a few weeks behind us, many investors will likely be turning their mind to the topic of distributions, so we thought we’d provide answers to some of the commonly asked questions. Needless to say, if you have any more specific questions make sure you contact us on 1300 487 577.

It’s important to note BetaShares is not a tax adviser and this information should not be construed as tax advice. You should obtain professional, independent tax advice before making any investment decision or completing your tax return.

1.

How do I get an annual tax statement for my BetaShares investments?

2.

Last year, when I submitted my tax return in mid-August, all my ETF distributions were pre-filled into my tax return. I just checked, and this year none of my information has been pre-filled. Does it take some time for the unit registries to update this info, or will I have to manually enter the details this year?

3.

Does it make a difference to my tax if I take my distributions in cash or participate in a distribution reinvestment plan (DRP)?

4.

Why do some Australian-domiciled fund distributions contain foreign source income, and some do not?

5.

What are the benefits of participating in a DRP vs. taking my distributions in cash?

6.

We can’t purchase fractions of an ETF. So how does a DRP work, if there is an amount available for reinvestment that is a fraction of the cost of a unit?

7.

What happens to the value of the ETF when it goes ‘ex-distribution’?

8.

Is it better to buy ETF units before or after the ex-distribution date?

1. How do I get an annual tax statement for my BetaShares investments?

Every year in July, tax statements are made available to investors in all BetaShares funds that have paid a distribution during the previous financial year.

In previous years, these tax statements were sent by post unless an investor had specifically requested them in electronic form. Tax statements for the 19/20 financial year will now by default be made available to all investors via Link Market Services’ Investor Centre and not sent by post unless specifically requested. You can submit a request to receive your tax statement by post via Link Market Services’ Investor Centre or by calling 1300 420 094.

It’s important to make sure you have registered your details with Link to receive your Tax Statement promptly:

Register via BetaShares >> 

Register directly with Link >>

If you need to check whether Link has all your details, you can also contact them directly on 1300 420 094.

2. Last year, when I submitted my tax return in mid-August, all my ETF distributions were pre-filled into my tax return. I just checked, and this year none of my information has been pre-filled. Does it take some time for the unit registries to update this info, or will I have to manually enter the details this year?

It does take some time for unit registries (including our registry, Link Market Services) to pass information on to the ATO – but there is no need to manually enter these details. Once the pre-fill has occurred, you should still check the information that is pre-filled by the ATO against the annual tax statement you receive for your BetaShares holdings to ensure they match up.

3. Does it make a difference to my tax if I take my distributions in cash or participate in a distribution reinvestment plan (DRP)?

Your ETF’s distribution will be subject to income tax, regardless of whether you take it in cash, or participate in a DRP.

If you participate in a DRP, it is important to keep records of each distribution. If and when you come to sell your units, you will need to calculate your capital gain/loss, and this must be calculated for each individual parcel of units you have bought, including those you received as part of a DRP. You need to know the date and allocation price for each distribution that was reinvested.

4. Why do some Australian-domiciled fund distributions contain foreign source income, and some do not?

Foreign source income is income that has been derived in a country other than Australia, and which has not been subject to Australian tax.

If a company earns foreign source income and passes that on to an Australian investor as part of a distribution, it will identify that component of the income as ‘foreign source income’. If the income has been taxed overseas, the distribution may also contain a credit for the tax paid overseas. Depending on your individual circumstances, you may be able to claim an offset for tax paid overseas.

If an ETF’s portfolio includes companies that earn foreign source income, then your distributions from that ETF may include a foreign source income component, and possibly a foreign income tax offset. Details of the components of your distribution will be contained in the annual tax statement you receive for your ETF.

5. What are the benefits of participating in a DRP vs. taking my distributions in cash?

Whether you should take your distribution in the form of cash or elect to participate in a DRP (where one is available) depends on your individual circumstances and investment goals.

Participating in a DRP can be a convenient way of increasing your investment. You are not charged brokerage on the incremental amount invested. Therefore, if you don’t need the cash, participating in a DRP can help you to increase the value of your portfolio.

A DRP also enables you to enjoy the benefits of compounding. As your holding of units increases over time, you will essentially be increasing your investment amount and may potentially benefit from distributions paid on your increased holding.

If, however, you rely on your investment income for your living expenses, you may be better off taking your distributions in the form of cash.

6. We can’t purchase fractions of an ETF. So how does a DRP work, if there is an amount available for reinvestment that is a fraction of the cost of a unit?

If you participate in a DRP, the amount you receive in a distribution is applied to purchase additional units in the ETF. Any amount left over will be retained on your behalf and added to subsequent distributions to purchase new units.

For example, assume you receive a distribution of $60, and the ETF unit price is currently $40. You would receive one new unit, and $20 would be credited and applied at the time of the next distribution. Assume the next distribution also is $60, and the ETF unit price is still $40. Using the $60 distribution, plus the $20 carried over from the previous distribution, you would have $80 available to be reinvested, and so would receive two further units in the ETF.

7. What happens to the value of the ETF when it goes ‘ex-distribution’?

All other things being equal, on the date an ETF goes ‘ex-distribution’, its price will typically fall by approximately the amount of that distribution.

If you purchase an ETF ‘ex-distribution’, you are not entitled to the distribution that has just been declared. In contrast, investors who hold an ETF ‘cum-distribution’ (i.e. as at the record date for determining entitlement to the distribution) are entitled to receive payment of the distribution that has been declared.

For investors who hold an ETF cum-distribution, the value of the units in the ETF will typically fall on the ex-distribution date, all else being equal, but the distribution investors receive should approximately offset the loss of value.

For example, assume an ETF’s units are trading at $50 per unit before going ‘ex’ a $2 per unit distribution:

  • An investor who held the ETF ‘cum-distribution’ would be entitled to the $2 per unit distribution due to be paid. The price of the ETF units should fall on the ex-distribution date by approximately $2 per unit, all else being equal, such that the distribution received roughly offsets the loss of value.
  • An investor who purchased the ETF immediately the units went ‘ex-distribution’ may have been able to buy at a lower price, around $48 per unit, but would not be entitled to the $2 per unit distribution.

8. Is it better to buy ETF units before or after the ex-distribution date?

There is no right or wrong answer to this question.

As explained above, all else being equal, when you buy ex-distribution you are likely to pay a lower price for your units – but you will not receive the distribution that has just been declared. When you buy cum-distribution, you will likely pay more – but you receive the distribution. Taking both purchase price and distribution into account, your net outlay may be quite similar.

However the tax implications will differ.

If you buy cum-distribution:

  • You must include the distribution as income in your tax return for the financial year in which the distribution is declared.
  • You may be entitled to a franking credit (where applicable).
  • Your cost base for the units will be higher than if you had purchased ex-distribution – so when you ultimately come to sell your units, your capital gain will be less (or capital loss greater) than had you purchased ex-distribution.

If you buy ex-distribution:

  • The relevant distribution is not included in your tax return.
  • Your cost base for the units will be lower than if you had purchased cum-distribution – so when you ultimately come to sell your units, your capital gain will be greater (or capital loss lower) than had you purchased ex-distribution.

Note that the above discussion is most relevant where you purchase ETF units immediately before or after the ETF goes ex-distribution. The further away from the ex-distribution date you get, the more the ETF price will be affected by variables other than the payment of the distribution.

4 Comments

  1. Tristen  |  August 7, 2020

    Thank you for these really helpful answers. In further to Question 6. DRP reinvestment, what happens if there is a part of the dividend left over, and before the next dividend payment you sell all the securities in that holding? Does the fractional amount get paid to your registry held account details, or do you need to track it down for payment by other means? Thanks for your guidance.

    1. BetaShares Client Services  |  August 11, 2020

      Hi Tristen,

      Thank you for your comment.

      If there is a residual distribution balance that does not make up a whole unit, and fund units are then sold, you can request a refund of the amount by calling Link Market Services Contact Center on 1300 554 474.

      Sincerely,

      BetaShares Client Services

  2. Hi,
    how is the price of the units calculated for the purpose of DRP? Is it the NAV price, or some function of the ASX price for the day, or… ?

    1. BetaShares Client Services  |  October 26, 2020

      Hi John,

      The DRP price is typically calculated at a slight discount to the NAV.

      Sincerely,

      BetaShares Client Service

Leave a Reply