Exchange-Traded Funds (ETFs) are investment vehicles, often set up as unit trusts, that trade on the ASX (or other exchanges) like ordinary shares. Instead of buying individual stocks or bonds, when you invest in an ETF you get exposure to a diversified basket of assets, for example, shares in many companies, bonds, commodities or mixed-asset portfolios.
How ETFs Generate Return
When you invest in an ETF, you can make money in two main ways:
- Distributions from the ETF (income)
- Capital gains when you sell your ETF units
Understanding Distributions from ETFs
ETF distributions typically come from income generated by the fund’s underlying assets:
- Dividends from equities
- Interest from fixed-income assets
- Capital gains, when the ETF sells some of its holdings and realizes a profit
- These distributions are normally paid quarterly or semi-annually.
Attribution + AMIT Structure
Many Australian ETFs are structured as Attribution Managed Investment Trusts (AMITs). Under AMIT rules, the ETF attributes taxable income to its unitholders even if cash isn’t distributed immediately. The attribution is based on the trust’s income over the financial year (1 July–30 June), not necessarily when cash lands in your bank.
How the ATO Treats ETF Distributions for Tax Purposes
At the end of each financial year, you’ll receive a tax statement from your ETF either:
- an AMMA statement (if the ETF is an AMIT) or
- a Standard Distribution Statement (SDS) for non-AMIT funds (Australian Taxation Office)
This statement breaks down the different components of your distributions: income, gains, franking credits, etc.
Character of Income Is Maintained
The ATO requires that the distribution “retains its character” when passed on to investors. That means:
- Dividend income remains dividend income
- Interest remains interest
- Capital gains remain capital gains
Franking Credits
If your ETF holds Australian companies that pay franked dividends, the ETF may pass on franking credits to you. These credits are included in your AMMA/SDS and you may be eligible to claim them as a tax offset.
Capital Gains When You Sell Your ETF Units
When you sell your ETF units, you may make a capital gain or a loss, depending on the sale price versus your cost base.
- If you sell for more than you paid, you have a capital gain.
- If you sell for less, you have a capital loss, which you can use to offset future capital gains (but not other income).
CGT Discount for Long-Term Holdings
Under ATO rules, if you hold the ETF units for more than 12 months, you may be eligible for a 50% capital gains tax (CGT) discount. That means only half of the gain is included in your assessable income.
Important Tax Considerations and Recent ATO Guidance
Record-Keeping Is Crucial
The ATO strongly emphasizes keeping good records:
- purchase and sale dates
- the cost of units (including brokerage)
- any reinvested distributions
- details of your AMMA / SDS statements
Without accurate records, it’s easy to misreport or miss key components in your tax return.
Timing of Attribution vs Cash Payment
Because of the AMIT structure: even if the cash distribution is paid after 30 June, the income may still be attributed to the prior financial year. That means don’t rely only on when money hits your bank use the AMMA/SDS to determine which tax year to report.
New ATO Guidance on Capital Raising & Franked Distributions
In September 2025, the ATO released Practical Compliance Guideline (PCG) 2025/3, which addresses situations where companies (or funds) raise capital to pay franked distributions.
- Under section 207-159 of the Income Tax Assessment Act, distributions funded by capital raising may be deemed unfrankable if they don’t align with the company’s normal distribution practices.
- The guideline provides the ATO’s compliance approach, including the factors they will use to assess whether such arrangements are artificial or contrived.
- This is especially relevant to ETF investors holding equity ETFs: if underlying companies make distributions funded by fresh capital (rather than from profits), the franking credits may be at risk.
Tips for ETF Investors:
- Locate and Save Your AMMA or SDS
After 30 June, make sure you download and store the ETF’s AMMA or SDS – this is your primary tax document for ETF income. - Check ATO Prefill, But Don’t Rely Entirely on It
While many ETF distributions will be pre-filled in your ATO tax return, you should verify those numbers against your AMMA/SDS. - Understand Cost Base Adjustments
With AMITs, there may be cost-base adjustments each year (increases or decreases) shown on your AMMA. Use these when calculating CGT later. - Use Your Franking Credits Wisely
Make sure you include your franking credits in the correct label (e.g., Label 13 Q in your tax return) — this could give you a meaningful offset. - Be Cautious of Artificial Capital-Raised Distributions
Given the new PCG 2025/3, be aware that the ATO may scrutinize distributions from companies or funds that raise capital specifically to pay dividends or distributions. - Seek Advice When Needed
If your situation is complicated (e.g., foreign ETFs, reinvestment plans, large transactions), consider consulting with a registered tax agent or financial adviser. The tax treatment of ETFs can be nuanced.
Final Thoughts
ETFs are a highly flexible and efficient way for Australians to invest in diversified portfolios. But with this flexibility comes tax complexity especially around distributions, franking credits, and capital gains. By using the latest ATO guidance (including PCG 2025/3), keeping good records, and understanding your AMMA / SDS statements, you’ll be much better placed to manage your ETF tax position and avoid surprises at tax time.
Source: ATO
—————BOOK YOUR EXCLUSIVE 15 MINUTE ZOOM CONSULTATION————-
We offer a 15-minute no obligation consultation to existing property investors, first home buyers and small business owners who are looking at property investments, business and asset protection. To Book an Appointment simply click here and pick a time and date.
BOOK YOUR ZOOM APPOINTMENT HERE
How can we help?
If you have any questions or would like further information, please feel free to give our office on 08 9221 5522 or via email – info@camdenprofessionals.com.au or arrange a time for a meeting so we can discuss your requirements in more detail.
General Advice Warning
The material on this page and on this website has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained on this page and on this website is General Advice and does not take into account any person’s particular investment objectives, financial situation and particular needs.
Before making an investment decision based on this advice you should consider, with or without the assistance of a securities adviser, whether it is appropriate to your particular investment needs, objectives and financial circumstances. In addition, the examples provided on this page and on this website are for illustrative purposes only.
Although every effort has been made to verify the accuracy of the information contained on this page and on this website, Camden Professionals, its officers, representatives, employees, and agents disclaim all liability [except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained in this website or any loss or damage suffered by any person directly or indirectly through relying on this information.
Recent Comments