Warning to all ETF shareholders doing their tax returns

Exchange-traded funds are so popular now, but there is a taxation trap ready to maim any investor who is not careful.

A surprised and curious male investor drinks black coffee while reading the latest news on rising ASX shares in the newspaper

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Exchange-traded funds (ETFs) are widely popular these days, with more than 600,000 Australians owning shares in them.

But as the October tax return deadline looms closer, they're warned not to make any errors or omissions in their submission to the Australian Taxation Office (ATO).

Following the ATO's 4 tips to first-time ASX investors earlier this month, H&R Block tax communications director Mark Chapman spoke to The Motley Fool about ETFs specifically.

"Whilst investing in an ETF might look similar to an investment into an individual share, the tax implications are very different," he said.

"Basically, an ETF takes the form of a trust. The return paid by an ETF takes the form of a distribution from the trust."

How ETF income reporting is a landmine

As far as investors are concerned, they just receive one income from an ETF — a distribution.

But because ETFs themselves invest in a wide variety of stocks, that distribution could come from many different sources.

Chapman named dividends, franking credits, interest, foreign income and capital gains, as just a few examples.

"Each of those individual elements then needs to be split out by you and entered into the correct boxes on your tax return," he said.

"The potential for mistakes is considerable!"

Lucky for ASX investors, there's one document that'll save you

Fortunately, each year ETF providers will send to all shareholders what's called a Standard Distribution Statement (SDS).

That document breaks down all the different sources of your ETF income, giving you the exact numbers to fill in for specific boxes in your tax return.

"Make sure you look out for — and keep — your annual tax statement because without it, completing your tax return accurately can be almost impossible," said Chapman.

The ATO also reminded investors that the statement has another useful purpose.

"When an investor disposes of units, the SDS will show the capital gains or losses made from the sale of the units which also need to be included in tax returns."

Chapman warned that the tax office now uses data matching to verify numbers, so accuracy is paramount.

"The fact that the ATO now receives pre-fill information about ETFs makes it even more important that the income and gain are disclosed and that the disclosures are correct," he said. 

"The ATO can now match your tax return with the information received from funds and if there is a difference, you can expect a 'please explain' letter from the taxman."

He added that a professional look over the tax return couldn't hurt.

"The many different taxable elements of an ETF can be difficult to understand and including the information on your tax return — in the correct boxes — needs an expert eye."

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Tax

Elderly couple look sideways at each other in mild disagreement
Retirement

How would the proposed unrealised gains tax impact your superannuation?

If passed, the impacts could be profound for those with higher-end super balances.

Read more »

Tax time written on wooden blocks next to a calculator and Australian dollar notes.
Tax

Don't forget your franking credits this tax time

Franking credits form an important part of your returns from your dividend shares.

Read more »

Tax time written on wooden blocks next to a calculator and Australian dollar notes.
Tax

Own ASX shares? Here are 3 investing tax deductions you may not be aware of

Make sure you don't miss out on any of the tax breaks available to owners of ASX shares this tax…

Read more »

A golfer celebrates a good shot at the tee, indicating success.
Tax

Tax time: If you have ASX shares, here's what you need to know about franking credits

Franking credits are vital to your returns from ASX shares.

Read more »

A woman in a hammock on her laptop and drinking a smoothie
Tax

How to turn your stage 3 tax cuts into $11,396 buying ASX 200 shares

Do you plan to invest your stage three tax cuts in ASX shares?

Read more »

Man holding a calculator with Australian dollar notes, symbolising dividends.
Tax

How is passive income taxed in Australia?

When it comes to passive income, the ATO is very clear.

Read more »

A man sits at his home desk calculating tax on a calculator.
Dividend Investing

Tax-busters: 5 fully-franked ASX dividend shares I'd buy for FY24

Fully-franked dividends can give you income while helping you pay less tax.

Read more »

a young boy dressed in a business suit and wearing thick black glasses peers straight ahead while sitting at a heavy wooden desk with an old-fashioned calculator and adding machine while holding a pen over a large ledger book.
Share Market News

How can I maximise my ASX franking credits in FY24?

Let's look at the benefits of franking credits and which ASX shares have big, growing yields.

Read more »