Withholding tax on dividends

[drew]

I have spoken with ASB Securities and they will check why taxes are being withheld at 30% and get back to me. From my discussion with them it sounds like ASB hold the shares through a custodian that is based in the US. I suspect this is the reason why the tax is being withheld at 30% not the DTA rate of 15%, reason being the US/NZ treaty states the maximum withholding on dividends is 15% provided the "beneficial owner" is not carrying on business in the US through a permanent establishment.

"Beneficial owner" is not defined but its likely that ASB have taken the position that for the DTA they are the beneficial owner and not me. I dont know if this is correct but will wait to hear a reply.

So the ASB nominee either is incorporated in the US or has an establishment over there which means the treaty does not provide relief.

777 and Ish - you are correct my mistake. Foreign taxes can be claimed using either the FDR or CV method provided you have income to offset against. Im surprised and this makes the FDR and CV methods even more appealing to me. A company paying tax at 30% only needs to achieve a dividend yield of 5% with taxes withheld at 15% will cover half of the tax cost alone, 30% taxes withheld fully cover the tax cost, under the FDR method assuming no quick sales.

Companies claiming foreign tax credits on dividends that are withheld at 30% will not going to be an issue so long as there is sufficient taxable income to claim the credits. Foreign taxes not utilised cannot be carried forward to future years so if there is not sufficient income to utilise all of the credits, the 30% witholding is not a good result.

For individuals that pay tax at marginal tax rates below 30% that 30% withholding tax will work against them.

I will wait for ASB to get back to me regarding this and see if anything can be done. If they cannot fix this then I will need to shift to another broker where i can hold the shares in my own name rather than through a nominee. Holding the shares in your own name will ensure that any taxes are only withheld at the DTA rate of 15%.

Investors should pay attention to their dividends and see what the withholding actually is. In some cases, eg if you are using the CV method and have losses then taxes withheld at 30% not 15% is money lost. Even if you do end up claiming them in your tax return there is still an opportunity cost of not being able to use the funds/taxes withheld.

[OldRider]

Drew: Prior to shifting ownership of your US shares from ASB's nominee company to yourself it would be prudent to discuss the ramifications of this move with others who may have made this move previously.

For myself I found the regular filling in of the documentation I was sent a pain, as well withholding tax deductions were made after some sales and repatriation of cash which I was never able to recoup, a year or two ago this was not too much of a problem because it became a local tax deduction, I don't think it would be the same today

If your investments are substantial it may all be worthwhile, but I did not consider it so,
and have shifted from direct ownership. However, things may be different today but a little investigation would do no harm. As well I found the service from US share registries
to querying correspondence quite poor, mostly no replies to Email, little better for mail, and difficulties getting the right person by phone.

[Jay]

No worries impacman.
One reason i will stick to ASX shares only (outside of NZ) so much simpler!

[impacman]

No worries impacman.
One reason i will stick to ASX shares only (outside of NZ) so much simpler!

Cool. Pretty much my philosophy as well.

[shasta]

I have spoken with ASB Securities and they will check why taxes are being withheld at 30% and get back to me. From my discussion with them it sounds like ASB hold the shares through a custodian that is based in the US. I suspect this is the reason why the tax is being withheld at 30% not the DTA rate of 15%, reason being the US/NZ treaty states the maximum withholding on dividends is 15% provided the "beneficial owner" is not carrying on business in the US through a permanent establishment.

"Beneficial owner" is not defined but its likely that ASB have taken the position that for the DTA they are the beneficial owner and not me. I dont know if this is correct but will wait to hear a reply.

So the ASB nominee either is incorporated in the US or has an establishment over there which means the treaty does not provide relief.

777 and Ish - you are correct my mistake. Foreign taxes can be claimed using either the FDR or CV method provided you have income to offset against. Im surprised and this makes the FDR and CV methods even more appealing to me. A company paying tax at 30% only needs to achieve a dividend yield of 5% with taxes withheld at 15% will cover half of the tax cost alone, 30% taxes withheld fully cover the tax cost, under the FDR method assuming no quick sales.

Companies claiming foreign tax credits on dividends that are withheld at 30% will not going to be an issue so long as there is sufficient taxable income to claim the credits. Foreign taxes not utilised cannot be carried forward to future years so if there is not sufficient income to utilise all of the credits, the 30% witholding is not a good result.

For individuals that pay tax at marginal tax rates below 30% that 30% withholding tax will work against them.

I will wait for ASB to get back to me regarding this and see if anything can be done. If they cannot fix this then I will need to shift to another broker where i can hold the shares in my own name rather than through a nominee. Holding the shares in your own name will ensure that any taxes are only withheld at the DTA rate of 15%.

Investors should pay attention to their dividends and see what the withholding actually is. In some cases, eg if you are using the CV method and have losses then taxes withheld at 30% not 15% is money lost. Even if you do end up claiming them in your tax return there is still an opportunity cost of not being able to use the funds/taxes withheld.

Drew

I also use margin lending thru ASB, you own the securities, they own the loan against them.