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This commentary is written by Vanguard’s Roger McIntosh. The title is Tax-effective share investing

It was first published on Friday 1 June 2012

And is read by Michael Mullins

Please remember that advice in this podcast represents a general view. It is recommended that you seek specific financial advice, before making investment decisions.

Individual investors, SMSFs and large public-offer superannuation funds appear to have a growing awareness of the impact that tax can have on their total returns.

The cover story in the May issue of Superfunds magazine reports that more large super funds are requiring their external fund managers to place greater emphasis on the efficient tax management of Australian share portfolios. (The Hunt for Real Returns, SuperFunds Magazine)

And an article in The Australian early this month discusses how astute SMSF trustees are aiming to “boost their real returns” in volatile markets by investing in more tax-effective ways. (Get Tax-Smart in Self-Managed Super Funds, subscription required).

The Australian’s article quotes Peter Crump, superannuation strategist for financial planning group ipac in South Australia, as saying that SMSF trustees are in a unique position to manage their tax efficiently because they really understand their members’ circumstances.

An investor’s efficient tax management of Australian shares does not solely mean minimising tax but also making the most of available tax concessions and exemptions.

Tax-effective practices often adopted by investors for their local share portfolios include:

1 Carefully controlling stock turnover: Excessive trading can unnecessarily trigger capital gains tax (CGT). Further, shares held for under 12 months are ineligible for discount CGT.

2 Investing in tax-efficient managed funds: Two actively-managed share funds, for example, may have identical pre-tax returns yet significantly different after-tax returns. By contrast, the low stock turnover of index funds, for instance, means that generally less CGT than actively-managed funds is payable.

3 Understanding the benefits of franking credits: Among the key attractions of Australian shares are franking credits for tax already paid at the corporate level. Investors receive a tax credit or a refund of excess credits if their tax rate is below the 30 per cent corporate rate.

4 Understanding their tax positions: Franking credits, for instance, are particularly valuable if superannuation-held shares are backing the payment of a pension. This is because super funds in the pension phase are exempt from tax on their earnings and therefore receive a full refund of their franking credits.

5 Seeking professional advice about matters such as participation in off-market share buybacks: Under share buyback programs, companies repurchase some of their own shares by paying a combination of a fully franked dividend and a capital amount. Depending upon the circumstances, buybacks may be especially attractive from a tax perspective to super funds in the tax-exempt pension phase.

Tax can potentially take a huge slice out of investment earnings. And without doubt, tax is worth managing as efficiently as possible.

And that concludes the column

Tax-effective share investing

from Roger McIntosh of Vanguard Investments Australia

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Please remember that advice in this podcast represents a general view. It is recommended that you seek specific financial advice, before making investment decisions.