Investment setup

Some things to think about as you’re looking to invest

International vs domestic

Key Split is between international shares and domestic shares

As an Australian tax resident:

Domestic (Australia)

Brokerage

You want to use Selfwealth. As an alternative, maybe you want to use CMC markets instead.

Top brokerage

Selfwealth is probably the simplest and easiest to use.

$9.50/trade is a very good price for brokerage

Note: Selfwealth does not allow you to use margin lending (i.e. borrow money to invest in shares).

Alternative brokerage

The other option is CMC markets.

Brokerage is either free for the first $1,000 of trades a day. For larger trades, it’s $11 or 0.10% of your trades.

Note that CMC markets, does allow margin lending but margin lending is risky!

Products to invest in

You want to invest in Vanguard Australian Shares Index ETF (VAS).

If you want a bit more risk you could also add in Vanguard MSCI Australian Small Companies Index ETF (VSO).

Explanation

Australian companies receive franking credits for the corporate tax they pay in Australia. These franking credits are then distributed to shareholders via franked dividends.

Only Australian tax payers can utilise franking credits that they receive as dividends, to offest their tax liability.

Investing in VAS/VSO with a CHESS sponsored account will ensure that information about the franking credits you receive will be appropriately recorded. At tax time, the relevant information should be automatically filled into MyTax.

International

Brokerage

You want to use CMC markets. As an alternative, consider Interactive Brokers.

Top Brokerage

The cheapest brokerage available is on CMC markets with $0 trades for UK listed products.

Note that CMC markets does allow margin lending via Leveraged, but that the interest rate is very high.

Alternative brokerage

As a backup, maybe you want to use Interactive Brokers instead.

Commissions are 0.10% per trade for UK listed products. (You want to look at United Kingdom, Fixed - Direct Routing on that page).

Some notes on margin loans: Interactive Brokers has very low cost margin loans, even after the 1% IBAU surcharge you’ll incur for being a natural person borrower.

However, that the margin limit for a retail cliet is capped at $50,000 - see retail client section here.

The margin loan policy at Interactive Brokers has moved around in the last few years, but there is no indication of whether there will be any future changes.

Products to invest in

You want to invest in UK-listed accumulating index ETFs.

Examples are:

  1. International shares - iShares Core MSCI World UCITS ETF (SWDA)
  2. Emerging markets shares - iShares Core MSCI EM IMI UCITS ETF (EIMI)

The easiest way to look at a list of the funds you can invest in is to get a list of UK-listed iShares funds here. Select “Download” > “Download all funds (xls)”.

Open the excel spreadsheet and filter allowing the following columns:

  1. Fund Type: ETF
  2. Distribution Type: Accumulating
  3. Asset Class: Equity
  4. Strategy: CORE

Explanation

UK-listed accumulating funds are like regular ETFs, except that they do not pay out any dividends. All dividends that the fund receives are reinvested inside the fund. Through the magic of European tax law, the index funds do not pay corporate taxes at that ETF level (although the underlying companies do pay corporate tax).

As a result, the money that would otherwise turn into dividends is capitalised into the value of your shares.

This means that investing in accumulating funds from Australia results in:

  1. No income tax liabilty on dividends, because there are no dividends
  2. What would have been dividends turns into capital gains
  3. You still have capital gains tax liability when you cash out, but you control timing and,
  4. If you hold it for more than 1 year, you get the 50% capital gains tax discount.

Note: You therefore have the ability to accumulate compound returns at the pre-tax rate and then pay tax at the end, which is quite advantageous when compared to paying tax on returns each year.