Own shares in a managed fund? Here’s how it affects your tax return

Question 1: Hello Craig, I have a fund managed for about 20 years and have made other investments in the fund from time to time. The returns are reinvested in the fund and each year the appreciation has been included in my income tax return. Since fund units are similar to stocks, do I have to pay capital gains tax on withdrawals?

Managed funds are popular and have a number of benefits for investors, including:

  • Professional portfolio management
  • Reinvestment of dividends
  • Diversification / risk reduction
  • Its divisibility – that is, you can make partial withdrawals (unlike a property)
  • Convenience
  • Unit price, which is fair to all investors.

However, one of the main disadvantages of traditional managed funds is that you have no control over capital gains from year to year.

You are correct that managed funds are treated like stocks for capital gains tax purposes.

As you noted, you’ve already included capital gains on your tax return every year.

This is because the fund manager would, at various times, sell the underlying stocks and hopefully make gains.

So over the past 20 years you would likely have paid capital gains for the majority of those years.

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

This is best illustrated with an example.

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

This $ 100 must be reported as income on your tax return 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 some stocks in its portfolio because the stocks have performed well and they see better value in buying other stocks.

The shares they sell have made a gain and they pass it on to unitholders, your share of the gain being $ 80.

This $ 80 must also be declared on your income tax return. And that’s what I mean by having no control over the tax results.

The managed fund can sell a lot of stocks and make a lot of money in years when you are subject to a high marginal tax rate.

Note that dividends and earnings must always be reported on your income tax return, whether or not you reinvest them.

When you make withdrawals, full or partial, you may have more capital gains tax payable if the unit price has increased.

On the plus side, in my experience, the capital gains tax tends not to be too high because you have paid little capital gains tax over the years because the managed fund has transformed the wallet.

Your managed fund provider should be able to provide a report to help you determine the earnings payable if you sold the investment.

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

Question 2: Can I take over my mom’s reverse mortgage while she is still alive?

A reverse mortgage will take the underlying property as collateral.

The property cannot be sold or transferred unless the reverse mortgage is paid.

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

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

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

The best result will depend on what you are trying to accomplish, and you may need to seek personalized advice as there are Centrelink and tax implications.

Question 3: As a self-funded retiree, I can presumably donate money to anyone I want. However, are my children and grandchildren subject to tax on cash donations?

You are right that you can give money and assets to whoever you want, and if you do not receive any Centrelink benefits such as age pension, there will be no negative impact on that side of the things.

But it should be noted that if in the future you are likely to apply for or become eligible for these benefits, then Centrelink will look at the previous five years to see which assets you have transferred.

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

But if you sell assets such as stocks or property, you will be liable for all costs and capital gains tax if those assets have realized a capital gain.

You mention “cash” gifts – giving money from one person to another does not incur any tax payable by either party.

Craig Sankey is a Chartered Financial Advisor and Head of Technical Services and Advisory Activation at Industry Fund Services

Disclaimer: The answers provided are general in nature and while motivated by the questions asked, they have been prepared without considering all of your goals, financial situation or needs.

Before relying on any information, be sure to consider the relevance of the information to your goals, financial situation, or needs. As far as the law allows, no liability for errors or omissions is accepted by IFS and its representatives.

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