Question: If our super fund bought into an ETF which owns only US shares we understand that US withholding tax of 30%, or possibly 15% would be deducted from distributions. Our fund is in pension phase and doesn’t pay Aussie tax; would we get a refund of the US withholding tax?
Answer (By Paul Rickard): Income earned on US investments will generally be subject to a withholding tax of 15%. In Australia, the tax you pay to the US Inland Revenue will be treated as a tax offset.
However, like most tax offsets – they are not refundable – so while they can be applied to reduce your tax payable, if they are not used, you don’t get the money.
So, if you are in pension mode and are not paying any tax, then you won’t be able to use the tax offset. In other words, you lose the withholding tax.
The one form of tax offset that is, of course, refundable is Australian imputation credits.
Question 2: I would appreciate your views about telco sector for growth and yield over long term.
Answer 2 (By Paul Rickard): The telco sector should ideally be a “growth” sector, however because Telstra dominates the sector in Australia, I think of it as an “income” sector. You really need to think of it in two parts – Telstra and the rest.
I think of Telstra as an “income” stock, and although it has some growth business (eg. mobiles), it also has other businesses in decline (eg. PTSN). I am happy if it stays domestically focused, works its existing business harder, and continues to pay high dividends. The phrase “Telstra and growth” scares me.
At its current price around $5.67, Telstra is (for me) a fraction expensive. I am not a seller, and would be a buyer in the low 5’s. If you haven’t got any in a yield portfolio, pretty hard to ignore the prospective fully-franked dividend yield of 5.3%.
Of the rest, have a look at TPG (ASX Code TPM), iiNet (ISU) or M2 (MTU). They are not “yield stocks”. M2 is probably trading on the cheapest multiple of 14.9 compared to ISU at 17.3 and a very expensive TPG at 27.1.
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