Question 1

Hi Craig, I have three separate managed investment funds and seek your advice in relation to the management fees and costs, as well as transaction costs. These are deducted direct from the accounts each year. 

Am I able to claim these amounts as tax deductions? I have had one account for more than 20 years and all returns have been added back to the account (and declared each year on tax returns). 

If the account is closed, is it liable for capital gains tax. How is this assessed, as the units reinvested have been at a different cost each quarter when the distribution was made?

Hello,

First, in relation to claiming a tax deduction on managing fees. No, the management fees and expenses incurred by the funds have already been deducted from trust’s income and are reflected in the distribution you have received.

If you have an adviser who deducts ongoing fees from the managed funds, then this may be tax deductible.

Second, regarding CGT, this area can be complex and requires attention to detail. It is important to keep thorough records of all dividend and interest reinvestments over the years.

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If you do not have these records, consider contacting your product provider. They often maintain this information, although its accessibility can vary.

Each time you would have reinvested the returns, it has its own cost base for CGT purposes. This is where a good product or platform provider can provide those details. If not, it means re-creating them via a spreadsheet (or there are software products than can do this).

For example, let’s say you had the following transactions:

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• $10,000 invested – unit price was $1 = 10,000 units
• $100 distribution reinvested – unit price was $1.01 = 99 units
• $105 distribution reinvested – unit price was $1.03 = 102 units

You now have 10,201 units. You sell/close your investment. The unit price is $1.02 so you receive $10,405.

CGT implications would be as follows:

• 10,000 units gained by $0.02 per unit ($1 to $1.02) = $200 gain
• 99 units gained by $0.01 per unit ($1.01 to $1.02) = $0.99 gain
• 102 units reduced by $0.01 per unit (1.03 to $1.02) = $1.02 loss

You would be able to reduce the gain by the loss and the 50 per cent CGT discount if the investment was held for over 12 months.

I suggest seeking tax advice about this.

One final thing I would like to point out in relation to managed funds. They do provide an easy way to invest and gain diversification, but you do not have control of the tax consequences.

What I mean is that each year you held these investments, the managed fund would be buying and selling some underlying investments. In fact, you would expect it to do so to ensure it is investing appropriately.

However, when it sells some of its underling portfolio, it may trigger a gain (or a loss). These gains are then distributed to the investors (unit-holders).

What these means is that you have probably paid a little bit of tax on the capital gains each year without knowing it, as I assume you have included your distributions in your annual income tax return. This must be done regardless of whether you re-invest the funds or not.

Depending on the managed funds you have invested in, a lot of gains may have already been paid out. Some managed funds are very active in buying and selling investments, whereas others buy and hold for long periods, therefore not triggering a gain.

The only positive side to this is that when you do work out the CGT when selling, it’s probably going to be less than you think.

Question 2

We are on the aged pension. We would like to sell our family home, as it’s a bit too big now. We will buy into an over-50s village.

My question is, will we have to pay capital gains tax when we sell the family home. We don’t own any other properties?

No, there is no capital gains tax when you sell your family home.

When moving into a lifestyle village there are a few variations. Generally, however, you are still considered a homeowner by Centrelink, and the amount paid for the new dwelling is asset exempt.

However, if you do funds remaining after the purchase of your new dwelling, these will be counted towards Centrelink’s income and assets test.

If you are paying site fees for the land, you may be eligible for rent assistance.  

Before signing a contract, seek professional advice to help you understand all the fees (initial, ongoing and potentially exit) as the contracts can be confusing.

Craig Sankey is a licensed financial adviser and head of Technical Services and Advice Enablement at Industry Fund Services.

Disclaimer: The responses provided are general in nature, and while they are prompted by the questions asked, they have been prepared without taking into consideration all your objectives, financial situation or needs.

Before relying on any of the information, please ensure that you consider the appropriateness of the information for your objectives, financial situation or needs. To the extent that it is permitted by law, no responsibility for errors or omissions is accepted by IFS and its representatives.