EOFY tips for ETF investors
With the end of financial year approaching, there can be tax benefits for clients holding ETFs over other types of investment.
The Australian ETF industry sits just shy of $200 billion, driven by flows into international and Australian equity vehicles. Advised money continues to be the largest source of net flows into the ETF industry for 2024, underlining significant adviser demand for these solutions.
In an EOFY update, VanEck finance director, Michael Brown, shared the top benefits of the vehicle when it comes to reducing the tax bill.
These are:
- Lower capital gains tax liabilities than actively managed funds
“The tax problem with the active management process is that it causes a lot of shares to be sold each year, whereas the index fund process does not. The more shares that are sold by the active fund manager in a year, the higher the investor’s capital gains tax liability for that year. This brings forward capital gains that would otherwise not be payable until the ETF units are sold.”
- Access to franking credits
“When a company pays tax to the ATO, it is able to attach franking credits to its dividends. Investors who receive the dividends then get the tax credited to them against their Australian tax liability. If they are an Australian resident and don’t have a tax liability, the ATO will refund the franking credits to them.
“When an ETF holds shares that pay franked dividends, the franking credits flow through to investors to reduce their tax liability. The level of franking credits that flow out of an ETF depends on its underlying shares portfolio.”
- Less tax for long-term investment
“If you’ve owned an ETF for 12 months, the law allows the taxable capital gain to be reduced by 50 per cent for individuals. This means that tax is only paid on half of the capital gain. The discount for SMSFs is one-third. This 12-month rule also applies to shares and REITs held by the ETF. The tax liability on the payments you receive from the ETF may, in part, be subject to this discounted tax rate.”
When including ETFs on a tax return, investors are recommended to keep records of their ETF trades and transaction details during the financial year and not submit their tax returns until they have received all their ETF tax statements.
AUTHOR
Laura Dew
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