Tax consequences

Buying and selling managed funds and receiving income may have tax consequences for you.

The funds may generate franking credits and you will be advised what to include in your tax return whenever a distribution is made from a fund.

Paying tax on distributions 

Most managed funds do not pay tax because they distribute their income to their investors. So you have to pay tax on the income component of the distribution at your marginal tax rate. The underlying franking credits are of course also passed on to you.

Some funds defer income until an asset is sold, so you may receive a distribution, part of which is tax deferred. That deferred bit reduces your cost base for CGT purposes and you pay tax only when the asset is sold.

Capital Gains Tax may apply

Capital gains tax (CGT) results when 1) investors sell units in the fund or 2) when assets within the managed investment are sold by the manager. If the latter occurs the capital gain is distributed to investors following the sale of investments and investors must then pay CGT on their share of these amounts.

Fund managers advise of any CGT amounts to include in tax returns each year. In each event the 50% CGT discount applies if the investment has been held for a year or more. After the end of the year, fund managers provide details of assessable income, capital gains and tax credits that are to be included in your tax return.

Better to provide your TFN

While it is not compulsory to provide a tax file number (TFN) or Australian Business Number (ABN), tax may be deducted at the highest marginal rate if you don’t.

You should consider seeking professional tax advice given the complex and often changing nature of the tax system.

Returns - be warned 

The assessable income amounts for Australian taxpayers is not able to be determined until after the end of the financial year when the fund provides the distribution/taxation statement. Compare this to companies, where the proportion of franked/unfranked is provided PRIOR to the payment allowing an investor to prepare for the impact of the payment. Late arrival of the statements is also a real nuisance for those conscientious folk seeking to get their returns in on time.

Investors should also note that published returns often do not take account of the capital gains tax payable by investors when assets within the managed investment are sold by the manager. This can make a very significant difference to net returns.