Own units in a managed fund? This is how it affects your tax return

Investors have to pay tax on the income from their managed-fund investments.

Investors have to pay tax on the income from their managed-fund investments. Photo: Getty

Question 1: Hi Craig, I have had a managed fund for about 20 years and have made further investments in the fund from time to time. Returns are reinvested in the fund and each year the capital gain has been included in my tax return. As units in the fund are similar to shares, do I pay capital gains tax on any withdrawals? 

Managed funds are popular and have many advantages for investors, including:

  • Professional portfolio management
  • Dividend reinvestment
  • Diversification/risk reduction
  • Its divisibility – i.e. you can make partial withdrawals (unlike with a property)
  • Convenience
  • Unit pricing, which is fair for all investors.

One main disadvantage for traditional managed funds, though, is that you have no control over the capital gains from year to year.

You are correct that managed funds are treated just like shares for capital gains tax.

As you have noted, you have been including capital gains in your tax return each year already.

This is because the fund manager would be, at various times, selling down the underlying shares and hopefully making some gains.

So, over the past 20 years, you would have been paying capital gains probably in the majority of those years.

Note that there is a difference between dividends received from the underlying shares (or interest from any underling fixed-interest investment) and a capital gain from the sale of an underlying investment.

This is best shown with an example.

Let’s say your managed fund invests in shares and receives dividends from these investments. Let’s also say that your personal share of these dividends is $100.

This $100 has to be declared as income on your tax return just like any other income, and tax must be paid on it at your marginal tax rate.

Additionally, let’s say the managed fund decides to sell down some shares in its portfolio because the shares have done well and they see better value in buying other shares.

The shares they sell have made a gain and they pass this on to unit holders, with your share of the gain being $80.

This $80 also has to be reported on your tax return. And this is what I mean by having no control of the tax outcomes.

The managed fund may be selling a lot of shares and making lots of gains in years where you are on a high marginal tax rate, so you would prefer they held off doing this, but unlike with buying shares directly, you have no say.

Note that both the dividends and gains still have to be reported on your tax return regardless of whether you are reinvesting them or not.

When you do make withdrawals, full or partial, you may have more capital gains to pay tax on if the unit price has risen.

On the positive side, in my experience, the capital gains tax tends not to be too high as you have been paying little bits of capital gains tax throughout the years, as the managed fund has been turning the portfolio over.

Your managed fund provider should be able to provide a report to assist you with working out the gains payable if you sold down the investment.

Additionally, it may also be a good idea to receive some qualified tax advice if the investment is significant.

Question 2: Can I take over my mother’s reverse mortgage whilst she is still living? 

A reverse mortgage loan will have the underlying property as security.

The property will not be able to be sold or transferred unless the reverse mortgage is paid out.

You can take over the repayments, but you cannot have the loan in your name.

Instead, you could take a separate mortgage or loan out and repay the reverse mortgage.

That way, the loan would be in your name, and generally home loan rates are lower than reverse mortgage rates.

The best outcome will depend on what you are trying to achieve, and you may need to seek personalised advice as there are Centrelink and tax implications.

Question 3: As a self-funded retiree, presumably I can gift cash to anyone I choose. However, are my children and grandchild liable to pay tax on any cash gifts?

You are correct in that you can give cash and assets to anyone you like, and if you are not receiving any Centrelink benefits such as the Age Pension, then there will be no adverse impacts from that side of things.

But it’s worth noting that if in the future you are likely to apply or become eligible for these benefits, then Centrelink will look back at the previous five years to see what assets you have given away.

The person(s) receiving the gifts will not be liable for any tax on receipt of your gift.

But if you are selling down assets such as shares or property, you will be liable for all costs and capital gains tax if those assets have made a capital gain.

You mention ‘cash’ gifts – giving cash from one person to another does not result in any tax payable from either party.

Craig Sankey is a licensed financial adviser and head of Technical Services & Advice Enablement at Industry Fund Services

Disclaimer: The responses provided are general in nature, and while they are prompted by the questions asked, they have been prepared without taking into consideration all your objectives, financial situation or needs.

Before relying on any of the information, please ensure that you consider the appropriateness of the information for your objectives, financial situation or needs. To the extent that it is permitted by law, no responsibility for errors or omissions is accepted by IFS and its representatives. 

The New Daily is owned by Industry Super Holdings

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