The tax implications of investing in shares; owning, holding, selling, dividends

Welcome to Finance & Fury’s ‘Say What Wednesday’! Today’s question is from John;

1. What are the tax implications of investing in shares, owning, holding, selling, dividends etc, does this vary to ETF, LIC etc?
2. Is tax payable on the change in value year on year, or only when a profit or loss is realised?
3. And does this change if they are held in a company or trust?

We’ll take a look at:

1. Types of taxes
2. Structures – Managed Funds, Shares, LICs and ETF

Two types of taxes

1. Income Tax – and Franking Credits depending on the investment
   • Franking Credits (FC) – helps avoid a double taxation. Tax is paid at company level and then calculated alongside your personal tax to ensure tax isn’t being paid twice and that you’re paying tax on that income at your marginal tax rate rather than the company tax rate.
2. Capital Gains tax

Income Tax

Companies – Shares/LICS – Same thing really

1. Shares/LICs pay dividends – the board sets the FC levels
2. Shares – vary regarding dividends and franking credits
3. LICs – Typically set a dividend and have FC attached

ETFs – work a little differently to Shares/LICs

1. Australia – Franking credits are attached in most cases but are a flow through from the underlying shares
   • Not going to be 100% Fully Franked
2. International – International shares which get withholding tax taken out overseas
   • 30% for US ETFs – can claim back 15% withholding tax from overseas income
3. Capital Gains – ETFs as a trust – They don’t pay any tax – it flows through
   • If they sell a share for a profit you pay the CGT – you do get the 50% discount though

Managed Funds

1. Income from managed funds are called distributions – made up of:
   • Dividends – As normal – Underlying companies pay dividend then this passed on
   • Franking Credits – offsets the income and comes from underlying shares
     • Small cap managers might not have any FC if underlying companies don’t
   • Capital gains realised – Either non-discounted (<12 months) or discounted (>12 months)
2. A highly active manager or geared fund can pay out large chunks of capital gains in a year if realised
   • I’ve had a geared fund make 70% in a year in realised gains – and got a big tax bill ☹

What is best for tax efficiency?

1. Typically Shares – Fully franked dividends
2. Then the next most efficient are ETFs – Low portfolio turnover or passive/index and not as much capital gains tax paid out. Can have lower FF dividends compared to blue chip shares
3. Lastly, managed funds – Typically higher tax payable due to distributions of capital gains

Reinvestment plans of Dividends

1. Even if you don’t get the income it is still treated as taxable income
2. Reinvest $1,000 of Dividends – you still have to pay the tax on it as if you received it

Capital Gains

(The difference between the price bought and the price sold)

1. ETFs/Managed funds – At a listed unit price – Net asset value – Sum of all shares
2. Shares Shares/LICs are at a price per share sold vs bought
3. ETFs – AS it is priced – same in gains
4. Managed Funds – CGT is still possible when you choose to sell it but typically lower CGT – They pay CGT out to you along the way and you bear the pain along the way

Tax environment – Depends on how they are held

1. Personally – Marginal Tax rates
2. Trust – Distributed
3. Company – Best to not – you don’t get a CGT discount

We went through a lot of information today – if you have any questions or want me to clarify things further please do get in touch. Head to https://financeandfury.com.au/contact/