Exchange traded funds (ETFs) that provide access to international markets, sectors and specific thematics continue to grow rapidly on the ASX, with now approximately 70 ETFs providing international equity exposures. International ETFs provide Australian investors with a simple and cost effective way to access growth opportunities, including under-represented (or even absent) sectors from the S&P/ASX200. However, as with any investment, it’s important to look at how the fund is structured. An often overlooked issue is the location or domicile of the fund, where the devil, of course, is in the detail.
Australian domiciled funds vs. CHESS Depository Interests (CDIs)
ETFs that invest in international (i.e. non-Australian) assets will generally come in one of two forms, largely indistinguishable on the surface but with quite different structures.
An Australian domiciled ETF is one that is formed, registered and regulated in Australia, is resident in Australia for tax purposes, and whose ‘home’ exchange is the ASX.
The alternative structure for international ETFs trading on the ASX is through a CHESS Depository Interest (CDI) in an already established offshore fund. In the case of ASX traded ETFs, all CDIs currently available are for funds based in the US. A CDI is a financial product quoted on the ASX which confers a beneficial interest in the underlying financial product to which it relates. A CDI will generally be listed by a global fund manager with an Australian presence and, though quoted on the ASX, it is actually a ‘cross-listing’ of the US fund.
Buying an interest in a fund that is domiciled in the US, for example, and cross-listed in Australia, presents certain considerations for investors:
- Foreign governance: Offshore funds are governed primarily by the laws of the country of their original listing, not Australian law.
- Additional administration: Because each CDI is an interest in the offshore fund, CDI holders are required to submit a W8-BEN form to the fund if they wish to reduce their withholdings tax (e.g. from 30% to 15% under the Australia-US double tax treaty). This is not a one-off and requires periodic updating.
- Legal implications: Being governed primarily by foreign law, investors in offshore funds may have to contend with legislation that does not exist in Australia, such as potential US Estate Taxes for US domiciled investments.
- Extra layer of withholdings tax – generally, an Australian resident holding a CDI on a US listed global exposure is subject to potential withholdings tax twice, ie from the foreign companies into the US and then into Australia.
By contrast, an investor in an Australian domiciled fund does not need to fill out individual W8-BEN forms because they are filled out once at the fund level, by the fund manager. Also, being governed primarily by Australian law, there are minimal, if any, direct foreign law impacts for investors. The investor is only subject to withholdings tax once on a global exposure – on the distributions from the foreign companies into Australia.
Australian domiciled or CDI? It’s worth ‘looking under the bonnet’ before you invest.
Adam O'Connor is Manager of Distribution at BetaShares. BetaShares is a sponsor of Cuffelinks and all their international funds are Australian-domiciled. This article does not consider the personal circumstances of any investor.