Morningstar research analyst Alex Prineas said while it would be unwise to make choices purely on tax considerations, tax should form a part of any investment decision.
Mr Prineas said the strategy used by the fund manager is one of the factors that can affect tax outcomes.
“For example, whether it’s active or passive, Australian or global, large-cap or small-cap, they all can have a bearing on the level of turnover, imputation credits and potential treatment of capital gains,” said Mr Prineas.
He said unlisted fund managers may want to improve tax outcomes by minimising turnover to delay the “crystallisation of capital gains”, and avoid selling shares before they become eligible for the GCT discount.
“Shares held for longer than 12 months are eligible for a 50 per cent CGT discount for individual investors, while superannuation investors get a 33.3 per cent discount,” said Mr Prineas.
Fund managers should also consider the 45-day rule that stipulates in order to be able to claim franking credits shares must be held for at least 45 days as well as the dividend imputation in their valuation methodologies, he said.
While exchange traded funds (ETFs) are similar to unlisted funds in terms of tax, when an investor leaves an ETF there are provisions to ensure they take their capital gains tax liabilities with them.
“It means ETF investors may be less exposed to the actions of their fellow investors, or the decisions of the fund manager to buy or sell assets,” said Mr Prineas.
He said that many ETFs “employ passive investment strategies that can contribute to low portfolio turnover and add to their tax effectiveness”.
When it comes to listed investment companies, Mr Prineas said management can take a longer-term approach to investing, which can mean low turnover and long holding periods.
“Low turnover and long holding periods typically are tax effective because they delay the crystallisation of capital gains and increase the likelihood that capital gains will qualify for the CGT discount,” he said.
