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The tax perks of listed investment companies

Listed investment company, LIC, ETF, exchange traded fund, ATO, Australian Taxation Office, tax, retirement savings, retirement planning, wealth management, wealth accumulation,

Much like ETFs, listed investment companies are a way for investors to access a diversified portfolio of assets while offering a number of tax benefits.

Speaking to Nest Egg, Australian Foundation Investment Company general manager of business development and investor relations, Geoff Driver, explained that listed investment companies (LICs) are no different from other companies available through a stock exchange.

“A listed investment company is like any other company that’s listed on the ASX. It’s a company structure in the context of it has capital to invest, but unlike a business like BHP that invests that capital in mines and equipment, we invest our capital into other shares on the exchange,” Mr Driver said.

“Like a company, we report every six months in terms of our profit and declare a dividend, and when we want to raise additional capital, we do so by issuing more shares, through dividend reinvestment plans, share purchase plans or rights issues.”

Given LICs operate exactly the way other companies do, they are taxed at the same 30 per cent rate as large companies, but also offer franking credits to their investors, Mr Driver said.

Additionally, LICs will manage the tax for their underlying investments and pass only an after-tax return, thereby simplifying the tax process.

Where LICs pay tax on capital gains, further deductions are sometimes available to that LIC’s shareholders, Mr Driver said.

When an LIC pays a dividend which includes an LIC capital gain amount, investors are entitled to a deduction of 50 per cent of the dividend amount that is attributed to the LIC’s capital gains, according to the ATO’s rules.

“That’s really trying to place the shareholder in the same basis as if they owned the shares themselves,” Mr Driver said.

“The only wrinkle to that is that it’s not offset against a person’s other capital gains within their own portfolio.”

Mr Driver did note, however, that investors who sell their shares in an LIC will still need to pay tax on those shares’ capital gains.

The tax perks of listed investment companies
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