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J#13: Maximize your dividends by minimizing your withholding taxes

man holding tax books

Two questions I often receive from my readers are:

  1. To qualify as a Double Digit Dividend recommendation, are our dividend yield thresholds net or gross of withholding taxes?
  2. Where do you source your investment ideas?

Let me answer the first question in this journal.

The recommendations we make at Double Digit Dividends are NET of withholding taxes

That is, the cash banked into your bank account will represent a double-digit yield.  We set a high yield threshold and, to be blunt, we are greedy 😊

Withholding taxes greatly impact your returns

For that reason we pay close attention to the withholding taxes you incur.

For example:

  • If we compare the returns from BHP’s London and ASX listings, you can see the real effects withholding taxes can have, depending via which stock exchange you invest.

    The graph below is a screen-print from Bloomberg.  The orange line indicates returns from BHP’s London listing.  The black line is from BHP’s Australian listing.  

BHP's London and BHP's Australia

The gap between the two lines is the premium/discount of returns.  Buying at a discount, via the London exchange has in the past led to you receiving up to 30% more dividends.

This was succinctly reported by Peter Ker in his Australian Financial Review 16 March 2020 article (excerpt below).  The full article can be read here

'30pc more dividend': BHP’s spread with London widens

“BHP’s London and Australian stock have equal rights over the company’s assets, with the only difference for investors being local tax laws.

”If you have the luxury of being able to invest globally, very rarely in the past 20 years have you had a better opportunity to set up the spread, or switch your Aussie position into the London line, especially income investors, because you get 30 per cent more dividend for the same dollar investment,” said one firm in a note to clients.”

  • The United Kingdom has a 0% withholding tax on dividends paid to foreign resident shareholders in UK-listed companies, in an otherwise high-tax jurisdiction.  Compare this to the United States, which levies a 30% withholding tax on dividends for non-US residents (of countries that don’t have a double-taxation agreement with the United States, including Singapore).  

    A 30% tax on the dividends received is a big chunk of your well-earned dividends that will not be credited into your bank account. With such a large withholding tax, it is UNLIKELY we will find investment gems with a double-digit yield in the US Market.  To get a NET 10%, we’d need a GROSS 14.3%.  So, looking at which countries to start our search for potential double-digit recommendations in makes a huge difference.

  • Compare the dividends you receive from an Australian-listed company that has no franking credits to one paid from Conduit Foreign Income.  On the former you are levied a 30% withholding tax. On the latter your tax rate is 0%.  
  • Compare the dividends you receive from a New Zealand investment with “imputation credits” to one without.  On the former, your withholding tax rate is 15%.  On the latter you pay a 30% withholding tax.

With our guidance and experience you can make use of nuances in the different Withholding Tax regimes to maximise your returns

Let’s discuss some of my investments in Australia and New Zealand.  

New Zealand & Their Fully Imputed Cash Dividends

The maximum withholding tax rate in New Zealand for non-residents is 30%.  If the dividends come with an “imputation credit,” your withholding tax rate goes from 30% to 15%.

Imputation credits (called “franking credits” in Australia) are tax credits passed onto individual taxpayers by companies, for the tax already paid at the company level.  They avoid the double taxation of dividends, once in the company’s hands, and once in the shareholders’ hands.

The same system does not apply in many jurisdictions, including the United States.  It is thus more tax-efficient for shareholders of US companies if the company buys back its own stock with money that it would otherwise pay out as dividends, and be taxed again.

I like researching New Zealand for investment gems.  It is a market that is often overlooked by investors.  I am not sure of the exact reasons but most, if not all, international online brokerage platforms I have come across (such as Saxo Bank or Interactive Brokers) do not have New Zealand stocks on their platforms.  It is also possible that some investors avoid the country when they see the headline “30% withholding taxes,” and fail to understand that with imputation credits, their actual tax rate is 15% or lower.

You can read up more on the New Zealand system in the following guide put out by the New Zealand government: https://www.classic.ird.govt.nz/forms-guides/number/forms-200-299/ir274-imputation-guide.html

Both the absence of easy access to the NZ market, and the misconception that NZ withholding tax is high deliver an opportunity for us to take the road less travelled and increases our likelihood of finding an investment gem.

I have been investing in the New Zealand market since mid-2015.  I use a full-service broker, Shaw and Partners, to access the New Zealand market.  They are located in Australia but will take your instructions over the phone or email.  If you would like an introduction, please message me at feedback@double-digit-dividends.com. 

My 2016 statement from Shaw & Partners is reproduced below.  Speaking from personal experience, two of my three investments (the New Zealand Stock Exchange and Hallenstein Glassons) listed in my statement below had a 100% imputation credit.  That brought my withholding tax bill from 30% to 15%.

Peter's tax information statement

Please note, I am NOT recommending that you buy Hallenstein Glassons nor NZX Ltd as they do not currently pay Double Digit Dividends.  I have also recently sold my shares in Kingfish Ltd as discussed in an earlier journal to you.  I still hold a significant number of Kingfish $1.64 warrants however.

With my Kingfish Ltd investment, it was even better.  My effective withholding tax rate was reduced from 30% to 5% by a supplementary dividend.  Kingfish is a New Zealand registered Portfolio Investment Entity (PIE) for tax purposes.  The PIE regime has significant advantages for shareholders. In particular, non-resident withholding taxes held are refunded by an additional supplementary dividend.  This can be seen in Kingfish Ltd.’s 20 June 2020 Distribution Notice below.

New Zealand is a good example where the headline withholding tax rate of 30% is just that, a “headline.”  With the investments I held, I received a 15% rate for 2 investments and a 5% rate for the other.  This is another reason why I like hunting in New Zealand for investment gems.

Conduit Foreign Income of Australian Listed Companies:

The maximum withholding tax rate in Australia for non-Australian resident taxpayers is 30%.  This is reduced if there are “franking credits” attached to the dividends, or if the recipient is resident in a country with a double-taxation treaty with Australia.

For dividends that have been “fully franked” at the Australian corporate tax rate of 30%, which applies to most listed companies, there will be no withholding tax.  In effect, the company paid 30% and the 30% credit is passed on to the non-resident taxpayer, and completely offsets the maximum withholding tax.

However, there are companies listed on the Australian Securities Exchange that make all their profits outside Australia.  So, they don’t pay tax in Australia.  That means they don’t get any franking credits.  For an Australian resident taxpayer, this is unattractive, as they will have to pay tax on the dividends they receive from such a company at their full personal marginal income tax rate, and not have the benefit of any franking credits.  Often that means local investors shun such stocks.

However, this is GREAT for non-residents like me (and you?).

As the source of income (for the dividends ultimately paid to you) is outside Australia, there is no (0%) withholding tax payable on dividends paid as “Conduit Foreign Income.”

You can see the amount of any dividend that is “Conduit Foreign Income” in Part 3 of the Dividend Notification statements that ASX-listed companies must release to the market.

Here’s the one from Jupiter Mines for its latest dividend:

Readers of my Jupiter Mines report would be familiar with this taxation treatment.  Thanks to their Tshipi manganese mine in South Africa, Jupiter Mines is able to pass on a hefty 17% dividend yield with 0% withholding taxes (to those who can take advantage of Conduit Foreign Income by virtue of being non-resident of Australia).  If you haven’t downloaded the report yet, make sure you visit our Recommendations page.

Franking Credits received from Australian Listed Companies:

A similar withholding tax mechanism to New Zealand’s “imputation credit” applies in Australia.  In Australia, they use the term “Franking Credits”.

If you are a non-resident, the franked amount of dividends you are paid or credited are not subject to withholding taxes (i.e. 0%).  So, a “fully franked” dividend, where the company has already paid corporate tax on all its dividend distributions results in no withholding tax.

In Australia (and similarly in New Zealand), the unfranked amount of any dividend will be subject to withholding tax at as much as 30%.  Further guidance is provided by the Australian Tax Office here.

Withholding Taxes & You

Withholding tax rates can get more complicated.  For example, in New Zealand if you make your investments through a corporation (rather than as an individual) or should you, as an individual, hold more than 10% or more of the direct voting interests in the company, the withholding tax rate applicable to you changes.

The investments we make are global and the tax structures you may use to invest in our recommendations are unknown to us.  We, at Double Digit Dividends, therefore cannot offer individual tax advice.

In writing our recommendations, we shall however assume that you:  

  • Are NON-RESIDENT.  That is, you are domiciled in a country other than the stock exchange the investment is listed on.  

    If you are domiciled in the same country as the stock exchange our featured investment is listed on, the general rule of thumb is you are not liable to any withholding taxes.  However, you will be paying whatever normal taxes apply to that dividend income in your country of residence.  Some countries, such as Singapore don’t tax dividend income, however, so you may get to keep 100% of any money that’s been paid to you net of withholding taxes at source. 

  • Are an individual investor (i.e. not a corporation or a special purpose vehicle).

  • Do not hold a significant block of voting rights.
  • Double taxation treaties do not apply to you (as we do not know where you are domiciled). This is a big factor that you should be aware of yourself.  If you live in a country that has a double taxation agreement with the country where the investment is located, you will often enjoy a reduced withholding tax rate, and you may also be able to claim money back on your own tax returns for tax withheld by some overseas countries.  
  • Have complied with all disclosure requirements required for a particular jurisdiction you are investing in (e.g. provided tax identification numbers where requested).  

Always check for exceptions that may apply to your specific circumstances which can enhance your NET, after tax returns.

A good source to check, as a first step, is PricewaterhouseCoopers’ Quick Charts: https://taxsummaries.pwc.com/quick-charts/withholding-tax-wht-rates#anchor-A

Countries With A Low “Headline”
Withholding Tax Rate

Knowing how to reduce the effective rate of tax on our dividend distributions by knowing and understanding the nuances and exceptions of a country with a HIGH “headline” withholding tax rate is one way to increase your dividend returns.  I’m here to help with that.

The other way is to find investments that are listed in a country with a LOW “headline” withholding tax rate in the first place.  I consider a low withholding tax headline rate to be 15% or lower.  Listed below are 78 countries with a withholding tax rate below 15%.

Needless to say, we will not seek to invest in any of the 78 countries listed in the table above, purely because they have a low withholding tax rate.  Instead we look primarily at a company’s dividend track record and examine very closely all the factors that are relevant, including whether the country’s “macro” risks, may hamper a company’s future ability to pay double digit dividends.

“Withholding Taxes” are one component of our Double Digit Dividends investment selection process.  It shall form part of the Investment Mandate should we decide to launch a Double Digit Dividend income fund.

In our journals ahead, I shall discuss the second most common question I receive; that is, where do you source your investment ideas? 

Until then, happy dividend hunting!

Peter

A Message for My Children

Life is “just a box of chocolates” as Forrest Gump would say in the movie of the same name.  What he is saying is just like there are different types of chocolates, as you open that box of chocolates you will encounter many surprises, good and bad, in your life’s journey.  

To add to this important message and in the context of this journal, “life” can be viewed like an investment’s withholding taxes.  It is not just a “headline” number.  It is complex and needs to be tailored to an individual’s specific circumstances.  Life is never a one-size-fits-all endeavour and it is always good practice to “peel-back the layers” on any subject you study.