How to navigate the tax maze when you invest overseas

Investing directly in overseas shares has become a lot easier, in part because online brokers CommSec and E*Trade provide access to the key global markets. What hasn't become easier is the task of negotiating the tax maze that can engulf those who venture offshore.

Among the complexities is the fact that, whereas tax treaties often result in what, in effect, is a discounted rate of withholding tax, the treaties vary. Or, in the case of some countries, they don't exist yet. We do have a treaty with the US capping the tax levied on dividends at 15%, but no set tax limit applies to income from real estate investment trusts (REITs).

Then there is the fact Australia's foreign income tax offset (or rebate) provisions don't guarantee to give you a credit for all the foreign tax you have paid.

Instead, complex rules determine each individual's offset limit for a particular tax year. Remember, to get the offset your tax return must declare all foreign income, including capital gains and any income that is exempt from Australian tax.

The fact countries aren't strictly bound by tax treaties can also be an issue.

A treaty may set the rate at 15% but, due to some technicality, the country may impose a domestic rate of, say, 25%. If this happens, only the 15% specified by the treaty is counted towards the Australian offset.

The investor has to seek a refund of the rest from the country in which the tax was levied.

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