Self-managed super funds (SMSFs) have often been criticised for lacking diversification when it comes to their investments, specifically that SMSFs have too much exposure to Australian ASX shares and cash and not a big enough stake in international shares and other global investments. We often get asked by our clients “How do we buy US shares via an SMSF?”
In this article we explore one of the best methods we’ve found to help people use their superannuation to invest directly in the US market including how to buy US stocks in some of the worlds largest companies like Apple (AAPL), Google / Alphabet (GOOG), Amazon (AMZN), Berkshire Hathaway (BRK.B), Facebook (FB) and Tesla (TSLA).
How SMSFs are buying US stocks in Australia
This criticism is unwarranted as SMSFs buy US shares via investments via Australian managed funds and ETFs. Research from Class Super shows that the underlying exposure to international equities across the top 20 managed funds and ETFs is 55.4% and 59% respectively (Source: Class SMSF Benchmark Report June 2019).
A large portion of SMSF trustees desire access to international investments, and are especially looking to buy US stocks to access the largest financial market in the world, however investing directly has traditionally been a costly and complex exercise. Trustees face a mountain of paperwork, complex forms and typically expensive international brokerage and FOREX fees.
Fees when buying US shares
When an investor in Australia looks to buy US shares, including when purchasing via their SMSF, they will typically incur both brokerage fees as well as foreign exchange fees to transfer Australian dollars into US dollars.
The typical broker fees from the established stock brokers such as Commsec International Trading for the purchase of USD $10,000 of US shares (NYSE, NASDAQ etc) is USD $29.95 plus FX fees of 0.60% ($60) so the total cost of the trade is US $89.95 – almost 1% of the trade value.
Fortunately for investors and SMSF trustees seeking access to the US stock market, competition has increased recent years and there is now a more user-friendly and cost-effective way to buy US stocks in Australia: Stake.
Stake was established in 2016 by Matt Leibowitz. Matt spent some time in Chicago with Optiver, a high frequency trading firm and when he returned back to Australia, he tried to open a US trading account. Matt discovered how broken the process was for Australian investors looking to trade US stocks, including all the paper forms, expensive fees and poor execution of trades.
That frustration turned into a business idea, and that idea became Stake. Stake has signed up 100,000 clients so far according to AFR: Online broker Stake hits 100,000 users amid Robinhood rally (AFR 22 June 2020).
You can refer to the Stake Australia website for further details on their fees.
|Trade Size $USD||Stake||CommSec International||ANZ Share Inv.||NAB Trade||Westpac Online|
The above table does not include foreign exchange fees (FX spread) which are: Commsec – 0.60%, ANZ – 0.60%, NAB – between 0.50% & 0.80%, Westpac – 0.60%.
The above is not a comprehensive comparison of all brokers who enable the trading of US stocks from Australia.
SMSFs buying US stocks in Australia using Stake
Setting up an account to invest in US shares via an SMSF with Stake is a breeze – we’ve done it! The set up is completely online – there is no paperwork to sign. All the identification and 100 point IDs checks are completed electronically (assuming you already have a self-managed super fund established).
In addition, Stake also takes care of the W8-BEN-E form. This form is a behemoth, and it you don’t complete one, you or your SMSF will be faced with increased US withholding tax on dividends from the stocks and ETFs you invest in (see below).
The first thing that happens when you complete an online application with Stake is that they set you up a Macquarie Cash Managed Account which acts as your Australian ‘wallet’. Next they will set you up an account with DriveWealth which you access via the Stake web app.
DriveWealth is a US regulated broker-dealer and (via ICBC US) acts as the custodian of the US shares you purchase via your Stake account. Your cash and securities are insured for up to USD$500,000 with the SIPC.
The entire application process takes 5-10 minutes. Once funds have cleared into the Macquarie account, you can transfer monies to the US dollar broking account. Stake uses OFX to effect the transfer of monies from Australian to US dollars and this is where they charge their 0.70% fee – i.e. $70 per $10,000. Once monies have been moved into the US broker account, there is no further cost to purchase US stocks and ETFs.
The entire process typically takes less than a week, and most of that time is waiting 1-3 days for funds to transfer into the Macquarie account and the same again for OFX to move the cash to your US dollar trading account.
How are dividends on US shares taxed in an SMSF?
When you buy US stocks using your super, the typically US withholding tax rate for non-US residents is 30%. Under the Australia / US double tax agreement, this rate is reduced to 15% – provided a W8-BEN-E form is completed by the SMSF (which happens automatically with Stake).
For an SMSF in accumulation phase, income tax is paid at the rate of 15%, so typically their income tax on dividends on US shares and ETFs will be completely offset by the 15% US withholding tax.
For an SMSF (completely) in pension phase, income tax is nil, therefore the excess foreign income tax credits are written off – i.e. they are not refundable the same way as franking credits on Australian company dividends are.
For an SMSF partly in pension and partly accumulation phase, the foreign tax credit will be a pro-rata offset based on the taxable amount of the foreign income and any surplus foreign tax credits will be written off.
How does capital gains tax work for an SMSF investing in US shares and ETFs?
Australian tax residents and entities (including SMSFs) have to pay capital gains tax on all worldwide investments including any gains when they buy US shares and then sell for a profit.
SMSFs fall under the non-resident alien category of investment where the only business they have in the US are passive investments held with a US dollar-denominated brokerage firm. This would apply to an SMSF investing in US stocks or ETFs via Stake.
Where an SMSF holds a US investment for more than 12 months, they are eligible for the general CGT discount of 1/3 which effectively reduces the rate of tax on capital gains for an SMSF in accumulation phase from 15% down to 10%.
It’s also important to understand that whether capital gains tax is payable is dependent on the profit on sales in Australian dollars. This means it’s possible to make a loss when some US stocks are sold, however due to FOREX changes (i.e. AUD versus USD) there could still be a profit when converted to Australian dollars (i.e. the US dollar increases against the Australian dollar).
In addition capital gains is still payable in Australia even if you keep the proceeds of the sale of US stocks in your Stake US dollar trading account. When you buy US shares in your SMSF, then sell them, there will be a capital gain or loss regardless of whether the proceeds are transferred back to Australia.
Does an SMSF pay tax on foreign currency exchange gains when moving cash USD to AUD?
It depends. Where a foreign transaction account has a balance of less than $250,000 AUD equivalent, any realised forex gains are disregarded. This is typically the default treatment for most trading accounts including the US brokerage accounts utilised via Stake.
For accounts that maintain a larger cash balance above $250,000 there will be tax payable on any realised forex gains (for example if your SMSF brings cash from USD back to AUD). The taxable income will be calculated via the first-in-first-out (FIFO) method.
This a complex area and it is recommended SMSF trustees seek competent taxation advice in regards to their specific situation. The ATO also has more information on their website here.
Grow as specialist SMSF accountants take care of all capital gains tax and FOREX gains / losses calculations through our specialist SMSF accounting platform Class Super.
When I buy US shares are they held in the name of my SMSF?
Yes. Investments are registered in the same name as your trading account and your SMSF is the beneficial owner. With Stake their US broker DriveWealth manages the books and records and the shares are held in custody by the US arm of one of the world’s largest banks.
Unlike Australia, the CHESS sponsorship does not exist in the US. Any US stocks and ETFs purchased via DriveWealth are held under a custody arrangement on your behalf. As per the account statements provided by Stake, custodial services provided Citibank, N.A and Velox Clearing LLC. For comparison, any US stocks purchased via Westpac Online Investing or Commsec International are held by Pershings as the custodian under a similar arrangement.
With Stake your SMSF is always the beneficial owner with a legal entitlement to the shares. This is similar to Australian to investment ‘wrap’ accounts like BT, Netwealth, HUB24. They own all the assets in their name on your behalf, but you / your SMSF are/is the entitled owner. The custodian arrangement is the default in the US and enables fractional shares which is useful.
Importantly the assets they hold as custodian are not theirs – and they’re not intermingled with the banks own assets so even if Citibank or DriveWealth or Stake or anyone goes out of business, you still have legal entitlement to the assets.
How to set up a Stake account to buy US stocks with super
As per their support article, with Stake, you can open an account in the name of your Company or in the name of your SMSF (both Corporate or Individual Trustees). We expect to be able to open Trust Accounts (with Corporate Trustees) in Q3 2020.
It takes 10 minutes to apply for an SMSF or Company account, and 2-3 days for your account to be ready, which includes setting up a Macquarie CMA (see below) and to do all the necessary verification.
For Company and SMSF accounts, you will not be required to upload any documents, but will need to have all the relevant details on hand to get your account set up quickly.
For setting up an SMSF, you’ll need to provide:
- the ABN of your SMSF & details of the trustee company or individuals
- personal details of the directors or individual trustees
- electronic signatures from all required signatories
For Company accounts, you’ll need:
- the ABN or ACN of the company
- personal details of the directors
- electronic signatures from all required signatories
Macquarie Bank CMA
When you apply for one of these accounts, you receive a Cash Management Account with Macquarie Bank. Its takes Macquarie 2-3 business days to verify and set up your CMA. With this CMA, you’ll get your own account in the name of your entity, which gives you a BSB and AC # to fund with AUD. You can then come back to Stake and transfer these AUD into USD without leaving Stake.
If you have an existing CMA, you can link it to your Stake account. This saves you time and gives you direct access to your funds to then transfer over to USD.
Existing Stake personal account
Other questions on how to buy US shares via an SMSF
Some related questions you might have searched for to find this article:
- How can I buy US shares in SMSF?
- How can I buy US stocks or ETFs in SMSF?
- Can SMSF invest in overseas shares?
- How can I buy US shares using my super?
- Buy US shares using superannuation
- Buying American shares in Australia
- How to complete a W8-BEN-E form for SMSF?
- How to buy Tesla shares in Australia?
- How can I buy Apple shares in Australia?
- How can I buy Zoom shares in Australia?
- How can I buy Google shares in Australia?
- How can I buy Vangaurd US ETFs using my superannuation SMSF?
- How to buy Apple Google Amazon Microsoft Tesla Zoom Facebook Netflix Alibaba Visa Berkshire Hathaway Paypal Disney NASDAQ NYSE
- How can I buy US shares in SMSF?
- Commsec International alternative
- NAB Trade International alternative
- Interactive Brokers alternative
The information contained in this article is provided as an information service only and, therefore, does not constitute, and should not be relied upon as, financial product advice. None of the information provided takes into account your personal objectives, financial situation or needs, and you will need to make your own decision about how to proceed. Alternatively, for financial product advice that takes account of your particular objectives, financial situation or needs, you should consider seeking financial advice from an Australian Financial Services licensee before making a financial decision.
- Whether an SMSF is a suitable retirement vehicle for you;
- Whether investing your superannuation in direct US shares and ETFs is appropriate for you;
- Ensuring your SMSF portfolio is adequately diversified and that you’ve met your obligations as a trustee of an SMSF in regards to diversification as part of your SMSF investment strategy;
- What other superannuation and investment options are available to you
Grow SMSF has designed a self-managed super fund solution that enables you to invest in US shares using your super.