Caution urged on listed property exits

Investment adviser Strategic Capital Management (SCM) is urging a cautious approach by investors considering exiting listed property trusts (LPTs), arguing that their recent strong performance has given to rise to capital gains tax (CGT) issues.

According to SCM, while LPTs are no longer performing as strongly as domestic and international equities, investors will need to think hard about altering their asset allocations, including taking into account the tax implications of moving out of LPTs.

It says that while the tax free component of income distribution from LPTs has been abolished for years, it is the tax-deferred component which may prove to be problematic.

“The deferred component of the income distribution will not be counted as taxable income,” SCM says. “However, the tax deferred amount claimed will be used to reduce the cost base of the average purchase price of the LPT investment, hence creating a higher capital gains liability.”

It says this liability will need to be paid when investors exit their LPT investment.

“Portfolio turnover can create a capital gains tax situation and before divesting, investors must look at their CGT position,” SCM says.

“If there is a net capital gain after investment gains have been offset by investment losses, investors will be liable for the tax paid on the net capital gain,” it says.

SCM says that the amount of tax paid will depend on the amount of time the investment was held prior to it being divested and the marginal tax rate being paid by the investor.

“If investments are held for 12 months or longer, then 50 per cent of the capital gain will be exempt and the rest will be taxed at the investor’s marginal tax rate,” it says.