How to Invest in International Shares from Australia

Australia represents approximately 2% of global equity market capitalisation. Investing only in Australian shares concentrates your wealth in a single country that is heavily exposed to China commodity demand, has outsized bank and mining sector weight, and lacks meaningful technology sector representation.

• Global diversification: International shares give you exposure to 98% of the world's listed companies - US technology (Apple, NVIDIA, Microsoft, Amazon), European healthcare and luxury goods, Japanese robotics and manufacturing, emerging market consumer growth
• Sector diversification: The ASX 200 is dominated by financials (~30%) and materials (~20%); there is no Australian equivalent of Apple, Google, or NVIDIA; to invest in global technology growth, you must invest internationally
• Currency exposure: International shares are priced in foreign currencies (primarily USD); when AUD weakens against USD, the AUD value of your international holdings increases - and vice versa; this currency exposure can be managed through hedging or accepted as a diversification benefit
• Long-run return record: MSCI World (ex-Australia) has delivered approximately 10–12% nominal annual returns over the past 30 years, driven primarily by US equity market performance; this has outpaced the ASX 200 total return over most long-term periods, though with significant shorter-term variation
• Not a substitute for Australian shares: Australian shares provide franking credits and home currency stability - a total international allocation removes these benefits; most financial planners recommend a blended approach (70–80% international, 20–30% Australian)
• Access options: ETFs are the most practical route for Australian retail investors - VGS (Vanguard International Shares, 0.18% MER), IVV (iShares S&P 500, 0.04% MER, US-only), BGBL (BetaShares Global Shares, 0.08% MER), or a direct US brokerage account for more sophisticated investors

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International ETFs come in two varieties - unhedged (exposed to currency movements) and hedged (currency movements neutralised). The choice between VGS (unhedged) and VGAD (hedged) is one of the most commonly debated questions for Australian ETF investors.

• VGS (unhedged): Your investment moves in AUD value as both the underlying share prices AND the AUD/USD exchange rate move; when AUD falls (common during global market stress), your VGS holding in AUD terms rises - a natural hedge against the correlation between AUD weakness and global equity falls
• VGAD (hedged): Currency movements between AUD and foreign currencies are largely neutralised through rolling currency forward contracts; your return is driven purely by the underlying share price movements; MER 0.21% (slightly higher than VGS at 0.18%) due to hedging costs
• The AUD 'risk-on/risk-off' correlation: The Australian dollar tends to fall when global markets fall (it is a 'risk currency' heavily linked to commodities); an unhedged international ETF therefore tends to rise in AUD terms during global crashes - providing some natural currency cushion; this is a genuine diversification benefit
• Hedging costs: Currency forward contracts cost money to roll - roughly 1–2% per year depending on the interest rate differential between Australia and the hedged currencies; this cost is embedded in VGAD's returns, not the MER; in periods of high Australian interest rates relative to US rates, hedging is expensive
• Long-term academic evidence: Over long periods (10+ years), currency effects tend to cancel out; most research finds that hedged and unhedged international portfolios produce similar long-run total returns for Australian investors; the choice matters more for short-to-medium term stability
• Practical recommendation: For long-term (10+ year) buy-and-hold investors, VGS (unhedged) is typically preferred - lower cost, natural AUD weakness hedge, simplicity; VGAD is more appropriate for investors with shorter time horizons or those who want stable AUD-denominated returns (e.g., retirees drawing income)

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When you receive dividends from foreign companies (directly or through an unhedged international ETF), the foreign country typically withholds tax before you receive payment. Australia has a mechanism - the Foreign Income Tax Offset (FITO) - that prevents double taxation.

• Withholding tax: Most countries withhold 15–30% tax on dividends paid to foreign investors; the US withholds 15% (for Australian residents, under the Australia-US tax treaty); Japan 15%; Germany 26.375% (reducible to 15% under treaty); the withheld tax is paid directly to the foreign tax authority - you receive the net dividend
• What you receive from VGS: VGS holds shares in 1,400+ companies across 23 countries; Vanguard receives gross dividends, pays foreign withholding taxes, and passes the net dividend to you; your annual distribution statement from Vanguard shows the gross dividend, foreign income tax withheld, and foreign income tax offset amount
• The FITO (Foreign Income Tax Offset): You include the GROSS foreign dividend in your Australian assessable income; you then claim an offset (not a deduction) for the foreign tax withheld; the offset reduces your Australian tax dollar-for-dollar up to your Australian tax liability on the foreign income
• FITO cap: The FITO is capped at the Australian tax otherwise payable on the foreign income; if you paid 30% foreign withholding but your Australian marginal rate is only 19%, you can only offset up to 19% - the excess 11% is a permanent loss (you cannot get a refund of foreign withholding beyond your Australian tax liability on that income)
• ETF simplification: When investing through an Australian-domiciled ETF (VGS, VGS.AU), the ETF manager handles all foreign dividend receipt, withholding tax payment, and FITO calculation; your annual distribution tax statement shows the net result - you simply enter the figures into your tax return; far simpler than managing individual foreign share holdings
• US-domiciled ETFs (e.g., VOO, VTI): If you invest directly in US-listed ETFs through a US brokerage, you hold the ETF in USD; the ETF pays US-source dividends; Australian tax applies on the full gross dividend; FITO applies for US withholding; but US estate tax exposure becomes a significant risk (see below)

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One of the most significant and least-discussed risks of investing in US shares or US-domiciled ETFs directly (rather than through Australian-domiciled ETFs) is exposure to US federal estate tax on death.

• US estate tax basics: The US imposes a federal estate tax on US-situated assets owned by non-US persons (non-resident aliens); the rate is up to 40% on the value above the exemption threshold
• Exemption threshold for non-residents: US citizens and residents have an estate tax exemption of $13.6M (2024) - effectively exempting almost all Americans; non-resident aliens (all Australians investing in US assets) have a far lower exemption of only $60,000
• What counts as US-situated: Shares of US corporations (Apple, Microsoft, VTI ETF) and US real property; US government bonds are generally exempt for non-residents; Australian-domiciled ETFs that hold US shares are NOT US-situated assets (the ETF is an Australian entity)
• The exposure: An Australian investor holding $500,000 in US shares directly (or via a US-listed ETF) dies with US-situated assets of $500,000; exemption $60,000; taxable estate $440,000; US estate tax at up to 40% = up to $176,000; this tax is completely separate from Australian death duty (Australia has no death duties at state or federal level)
• The solution - Australian-domiciled ETFs: If you invest in VGS (Australian-listed, AUD, domiciled in Australia) rather than VOO (US-listed, USD, domiciled in the US), you hold shares in Vanguard Australia - an Australian entity; this is NOT a US-situated asset; no US estate tax exposure regardless of the underlying US shares within the ETF
• Treaty protection: Australia and the US have a tax treaty, but it provides limited relief for non-residents on the estate tax; the treaty increases the effective exemption somewhat for Australians but does not eliminate the exposure for large US asset holdings; Australian-domiciled ETFs remain the cleanest solution

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Australian-domiciled international ETFs (VGS, IVV, BGBL, QUAL) are taxed in the hands of Australian investors the same as any Australian ETF - capital gains, dividends, and foreign income all follow standard Australian tax rules.

• Capital gains on ETF disposal: Same as Australian ETFs - sell ETF units held 12+ months, 50% CGT discount applies; each purchase is a separate CGT parcel with its own cost base and acquisition date; record-keeping is identical
• Annual distributions: International ETFs typically pay quarterly or annual distributions including: foreign income (dividends received from underlying shares), capital gains (from portfolio turnover within the ETF), and sometimes returns of capital; your annual tax statement from the ETF breaks down each component for tax return purposes
• Foreign income tax offset in practice: The distribution statement from VGS will show 'foreign income tax offsets' - enter this in your tax return; the ATO's myTax pre-fills this if you use the tax agent portal; it is a straightforward entry that saves you from double taxation on the foreign dividends
• No PFIC issues for Australians: US tax rules have a complex regime called PFIC (Passive Foreign Investment Company) that can cause punitive tax for US persons holding foreign ETFs; this does NOT apply to Australians - Australian investors holding Australian-domiciled ETFs face no PFIC considerations
• Currency gains and losses: The cost base of your ETF units is recorded in AUD; capital gains and losses on disposal are calculated in AUD; any AUD appreciation embedded in the gain (due to AUD weakening since purchase, increasing the AUD value of the unit) is taxed as a capital gain - the ATO does not separate currency gain from share price gain for ETF investments
• SMSF international ETF holding: SMSFs can hold VGS and other international ETFs in both accumulation and pension phase; dividends and capital gains are taxed at 15% in accumulation / 0% in pension; foreign income tax offset still applies to reduce the 15% accumulation tax; in pension phase, FITO creates a refund against the 0% tax liability (up to the foreign tax withheld)

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US estate tax threshold for non-residents: $60,000 (2024). Rate: up to 40% on excess. An Australian investor holding $500,000 in US shares directly could face up to $176,000 in US estate tax on death. Solution: use Australian-domiciled ETFs (VGS, IVV on ASX) rather than US-listed ETFs or direct US shares - Australian-domiciled ETFs are not US-situated assets regardless of their underlying US share holdings.

Currency hedging cost (2024–25): Approximately 1.5–2.5% per year embedded in hedged ETF returns (varies with AUD-USD interest rate differential). This cost is in addition to the MER - VGAD's 0.21% MER does not include the hedging cost, which is reflected in performance. Over 10+ years at high Australian rates, hedging can cost 15–25% of total return in foregone gains.

Foreign income tax offset (FITO): Offsets foreign withholding tax against Australian tax on the same income (dollar-for-dollar, capped at Australian tax liability). From VGS distributions, the FITO is automatically calculated in the annual tax statement - enter the 'foreign income tax offsets' amount directly in your tax return. Most Australian ETF providers (Vanguard, iShares, BetaShares) provide detailed tax component statements for each distribution.

VGS vs BGBL vs IVV fee comparison: VGS (MSCI World ex-Aus, 0.18% MER), BGBL (MSCI World ex-Aus, 0.08% MER - lower cost but smaller fund/less liquidity), IVV (S&P 500 only, 0.04% MER - US concentration but ultra-low fee). For cost-sensitive investors, BGBL or a 70/30 split of IVV (US) + VGS (full world ex-Aus) reduces MER significantly.

AUD/USD correlation with equity markets: The AUD tends to fall during global market downturns (correlated with commodity price falls and risk-off sentiment). An Australian investor holding unhedged VGS sees the AUD-denominated value of their portfolio partly cushioned by AUD weakness during crashes - a natural hedge. This correlation broke down in COVID (March 2020: AUD fell AND equities fell) but has held over most historical periods.

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