Taxation is an important concern for investors and the different investment structures offer different pro’s and con’s. Ultimately investors only end up with after tax returns in their pocket.
Taxation ETF’s and Managed Funds
Both managed funds and ETF’s are trust structures which has some pretty important taxation consequences for investors. ETF’s and managed funds distribute all of their income very year, they must they are trusts. Therefore capitals gains and various other types of income flow onto investors in the same proportion as the trust incurred them.
Managed funds have some unique taxation aspects that they do not share with ETF’s (refer to this article for more information)
Taxation Listed Investment Companies
Listed Investment Companies (LICS) on the other hand pay tax at the company level and have a choice of how much of their income to retain and how much to distribute as dividends. To the extent a listed company chooses to retain income rather than distribute it, it should be reflected in a growth in the share price and as a capital gain to investors rather than income.
LIC’s which do distribute, distribute both revenue and capital gains. Capital gains distributed to individuals from an LIC may be eligible for a tax deduction, refer to the ATO website which states the following:-
If a listed investment company (LIC) pays a dividend to you that includes a LIC capital gain amount, you may be entitled to an income tax deduction. A LIC paying a dividend will advise its shareholders how much of the dividend is attributable to a LIC capital gain (the attributable part).
An individual, trust or partnership can deduct 50% of the attributable part advised by the LIC. A complying superannuation entity, first home savers account (FHSA) trust or life insurance company can deduct 33 1/3% of the attributable part advised by the LIC.