How a Proposed Trump Tax Could Hit Your Super and US Investments

Disclaimer: This article discusses proposed legislation that is not yet law. The information is for educational purposes only and is not financial advice. Tax laws and political situations can change rapidly.

A proposed US tax policy, aimed at penalising foreign countries, could end up taking money directly from the pockets of everyday Australian investors. Whether you invest in US shares directly, through ETFs, or gain exposure via your superannuation, you are in the firing line.

Buried deep on page 959 of the Republican budget passed by the US House of Representatives is Section 899, titled “Enforcement of Remedies Against Unfair Foreign Taxes.” This section could have significant financial consequences for Australians. Here’s what you need to know.

What is Section 899 and Why Could Australia Be Penalised?

Section 899 allows the US to impose a tax of up to 50% on certain US-sourced income received by individuals and entities from what it deems a “discriminatory foreign country.”

A “discriminatory foreign country” is defined as any foreign country that has one or more “unfair foreign taxes.”

An “unfair foreign tax” includes diverted profits taxes and undertaxed profits rules (UTPR), which are designed to ensure multinational corporations pay a minimum level of tax.

Australia has both a diverted profits tax and has adopted the OECD’s Global Minimum Tax Rules. Because these measures affect many large American companies, Australia could be classified as a discriminatory foreign country under these proposed rules.

We are not alone; almost every OECD and European country has similar tax policies and could face the same penalties.

Who in Australia Would Be Affected?

The short answer is: almost everyone. The definition of “applicable persons” who would be subject to this tax is surprisingly broad. It includes:

• The Australian government.
• Any individual who is a tax resident of Australia.
• Australian-based corporations, trusts, and superannuation funds.

The types of US-sourced income that would be hit include business income, branch profits, capital gains from US real estate, and, most importantly for the majority of investors, investment income like dividends and interest. Our focus will be on US-sourced dividends, as this is likely to impact almost every Australian investor.

How the New Tax Would Impact Your US Dividend Income

Currently, the default US statutory withholding tax on dividends paid to foreign investors is 30%. Thanks to the US-Australia Tax Treaty, Australian residents typically enjoy a reduced rate of 15% after completing a W-8BEN form.

Under the proposed Section 899, this could change dramatically.

• Starting from the 15% treaty rate, the withholding tax would increase by 5% each year that Australia is designated a discriminatory country.
• The total withholding tax rate is capped, but can go as high as 50%.

The 'Tax Drag' Effect: Why You Could Lose Money

Under Australia's current system, when you earn US dividend income, you can claim the tax withheld by the US as a Foreign Income Tax Offset (FITO) on your Australian tax return. For most investors with a marginal tax rate above 15%, this FITO effectively cancels out the US tax, and you just pay the difference to the ATO. The tax revenue is simply split between the two governments.

However, the FITO is non-refundable and cannot be carried forward. If the US withholding tax rate climbs higher than your personal marginal tax rate, the excess offset is wasted.

This creates a "tax drag," where tax leakage eats directly into your investment returns.

The lower your marginal tax rate, the bigger the tax drag becomes, as a larger portion of the US tax cannot be claimed back.

In a worst-case scenario where the US withholding tax reaches 50%, every single Australian investor would be left with unused foreign tax offsets, and their long-term net returns could take a serious hit.

This would also mean the Australian government would no longer collect any tax revenue on US dividends, as the US would take it all.

Why Your Superannuation is at High Risk

Even if you don’t invest directly in US shares, your superannuation fund likely does. Exposure to US equities is a key part of most diversified investment options, making this issue relevant to nearly every Australian with a super account.

Superannuation is a low-tax environment, with earnings taxed at just 15% in accumulation phase and 0% in an account-based pension. Because this tax rate is so low, a large portion of any US withholding tax cannot be offset by the super fund. The tax drag is therefore even larger, which directly reduces the net returns of your super fund's investment options.

Australian vs. US ETFs: Is There a Difference in Impact?

Whether you invest in a US-domiciled ETF (like VOO) or an Australian-domiciled ETF (like IVV), the outcome is largely the same.

• With a US-domiciled ETF, the higher withholding tax is applied to you directly before the dividend reaches your account.
• With an Australian-domiciled ETF, the fund manager receives the dividend first (with the higher tax already taken out) and then passes the foreign income and tax offset details to you via an annual AMMA statement.

In both cases, you still face the same potential for wasted tax offsets and lower net returns. The only real difference is administrative; the Australian-domiciled fund handles the heavy lifting and provides a tax statement tailored for Australian tax returns.

What Should You Do Now? A 3-Step Guide

1. Don't Panic: This bill is not yet law. It has passed the US House of Representatives but still needs to get through the Senate, where there is division and it is likely to face significant debate. The earliest it could take effect is January 1, 2026, so don't make any drastic moves yet.
2. Acknowledge This is Analysis, Not Fact: This information is based on an interpretation of the proposed legislation. Given the shifting nature of US politics and some deliberately vague language in the bill, details may change.
3. Stay Aware of Potential Trends: Pay attention to which way the wind is blowing. We could see increased market volatility as news unfolds. Some investors may begin shifting their asset allocation away from high-dividend US stocks or start to prefer companies that favour share buybacks, as capital gains are not subject to this withholding tax. The key is to stay informed and flexible.