5 July 2012
It is that time of year when investors focus on tax as they gather the required paperwork to submit their annual tax returns. Whilst tax advantages should never be the sole purpose for investing, it is nevertheless an important factor in investment decision making. In this edition we will explore the costs associated with investing and some taxation implications.
Costs are incurred when purchasing and disposing of an investment. Some investments also have on-going costs such as annual fees. Investing in cash, such as term deposits or online savings accounts, generally has few associated costs.
Fixed interest investments sometimes have entry and exit fees, but rarely have ongoing costs.
Property investment has many costs involved with it, including stamp duty and solicitor’s fees on purchase, as well as the costs involved in finding the property and inspecting it. There are also ongoing costs such as agent’s fees, municipal rates, water rates and maintenance and repair costs.
Share investments have entry costs such as brokerage/commission. There can also be ongoing management fees if the investment is in a managed fund.
Managed investments will typically have administration fees, trustee fees, fund manager fees and transaction fees when assets in the fund are bought/sold.
La Trobe Financial does not charge investors any entry or exit fees if investment is held to maturity.
La Trobe Financial is entitled to receive an Investment Management Fee (1.41% p.a. average for the Fund across all options).
Tax on investments
Investment income is taxed in the same way as personal earnings (salary and wages) except for one important difference applying to dividends. In order to ensure that the income from dividends is taxed only at the investor’s marginal tax rate, dividend imputation exists (refer below). Any realised gains made on investments are subject to Capital Gains Tax (CGT).
Dividend imputation was introduced in 1987 to eliminate the problem of double taxation. Previously a company paid company tax on its profits and then an investor paid income tax on the dividends paid by the company, effectively paying tax twice. The Australian tax system now allows companies to attach franking credits to dividends paid, representing tax already paid by companies.
With the introduction of dividend imputation the investor gets a tax credit for any tax which the company has already paid. The effect of this tax credit is to ensure that the investor is not taxed twice. An investor with a marginal tax rate greater than the company tax rate (30%) will pay tax on the dividend at the rate of that marginal tax rate. An investor on a marginal tax rate less than the company will receive a tax credit/refund.
Capital Gains Tax
A capital gain occurs when the proceeds from the disposal of an asset exceed the cost base (purchase price and associated acquisition costs). Individuals have to pay Capital Gains Tax (CGT) on any capital gain made on the disposal of an asset that was acquired after 19th September 1985. Typically, 50% of the gain is assessable at the taxpayer’s marginal tax rate if the asset was held for 12 months or more. 100% of the gain is assessable as income if the asset was held for less than 12 months.
Rollover provisions apply to some disposals, one of the most significant is transfer to beneficiaries on death. On death, CGT assets transferred to beneficiaries are not treated as disposed of by the deceased, but instead the beneficiaries are taken to have acquired them at the deceased's date of death and with the cost base as at that date.
Assets Subject to CGT
Certain assets are exempt from capital gains tax, including:
- An individual’s main residence;
- Collectables acquired for up to $500, such as art, jewellery, stamps etc;
- Cars and other small motor vehicles such as motorcycles;
- Winnings from gambling.
The following table provides a summary of CGT and how it impacts the investor:
|When was Asset Purchased?
||How Long was Asset held?
||Capital Gain Assessable
|Before 20 September 1985
||Any length of time
||Generally no CGT payable
|Between 20 Sept 1985 & 20 Sept 1999
||> 12mths and disposed of after 21 Sept 1999
- Sales proceeds – frozen indexed cost base to 09/99 quarter, OR
- 50% of [sale proceeds – cost base (not indexed)]
|On or after 21 Sept 1999
||Less than 12 months
||100% of nominal gain
||> 12 months
||50% of nominal gain
As always, the content of this newsletter is general information only and you should consult your accountant, financial adviser or taxation professional to discuss your personal circumstances.
S&P Rating – four stars
S&P has affirmed the four star rating of the Pooled Mortgages Option. In its report S&P noted that “The team and process have-to date-delivered a well-diversified portfolio, as well as a very strong performance track record. The fund has comfortably exceeded its index over all time periods, and met its 1.5% excess return target over one and three years.” “A strong relative return, and a distribution level consistently above 7% per year, demonstrates [strong] resilience in what has been a difficult time for mortgage fund peers. Impressively, the fund has maintained a relatively low level of arrears and losses. It has also met redemption requests in line with its liquidity structure. This has proven a challenge for a number of La Trobe's peers.”
A copy of full report can be obtained by clicking on the link below:
S&P Fund Rating Report
The following award and ratings were given to the Pooled Mortgage Option within the La Trobe Financial Mortgage Fund