LIC & LIT LICs under threat from the new tax credits??

Whats all this about? - Am I reading this article correctly in that we will be penalised for investing in an LIC?

Listed investment companies under threat

"If investors are unable to receive a cash refund when their imputation credits exceed their tax liability, they will be penalised for using a company structure including listed investment companies to own their investments. Not only will they lose part or all the value of their imputation credits from their share investments but they also will face heavier tax bills on all other income received and taxed in the hands of the company managing their investments."


-Frank

 

It's been discussed at length already:

Franking credits - gone?

 

Has it? Oops..

Thanks for the link..

-Frank

 

That’s a good article thanks. Daryl Dixon will no doubt be concerned as he’s not only a major investor in LICs himself but his business Dixon Advisory has a number of its own LICs and they have been recommending LICs to their large client base for decades including myself a very long time ago.

For many moving from LICs to another structure would result in major CGT. They’re In a real bind. Plus these negatives will likely drive LICs into discount territory to compensate. So there could be a capital hit to existing holders. However the resulting NTA discount could be beneficial for accumulators willing to continue to invest in the sector.

Note that depending on the amount of embedded capital gains and / or if tax relief was offered, if the change was implemented a number of LICs would likely restructure to a Listed Investment Trust (LIT). This would be easier for the active “trading” LICs given minimal accumulated long term Capital Gains if there was no tax relief provided. You can get a rough idea of these by comparing before tax NTA with post tax NTA provided in their monthly reports. There generally will be relatively minimal difference.

The older style LICs which generally have a huge embedded long term capital gains component will unlikely be able to restructure. Then again they tend not to hold a lot of shares that don’t offer a notable level of franking credits. So given this and them being entitled to the LIC Capital Gains Discount (trading LICs don’t qualify) the older LICs may not be that badly impacted. But that doesn’t eliminate the possibility of these moving into discount territory due to reduced investor interest in the sector.

Also since the recent changes to Super ($1.6 Mil limit) and Labor proposing to tax Discretionary Trusts at a minimum 30% a number of advisors have been recommending a Company structure to hold personal investments outside of Super. Essentially it’s a private equivilent of a LIC and therefore I’m assumimg it will have the same disadvantages as those mentioned in the article. Perhaps a clever accountant can devise strategies to minimise the damage?

For me personally as a precaution and for future protection I’m increasing diversification into non-company fund structures.

Of course Labor needs to win the next election (unfortunately looking a strong possibility) and get these changes through a possibly mixed bag of senators. The final legislation if it gets through might be very different to what was originally proposed.

Not advice, personal thoughts only.

 

@Nodrog - can I ask what you are doing exactly with regards to this statement....

I assume you mean increasing your holdings of ETFs instead of LICs?
Are you also referring to changing the structure by which you hold assets outside of super?

 

Don't forget Shorten is also proposing a minimum 30% tax on distributions from trusts.

So I can't see how an LIC converting to a trust structute would be any more beneficial.

 

Just simply adding more to our existing ETFs (VAS and VGS) going forward. Simply spreading the money around a bit. My preference has always been LICs but given most of our wealth is in LICs I thought it wise going forward to diversify across Fund Mgr structures.

Outside of Super we’re in the process of eventually closing down the Disc Trust to hold assets in own names. The Trust doesn’t serve much purpose for us anymore.

 

That’s only Discretionary Trusts NOT unit trusts used by Fund Mgrs such as LIT’s, ETFs, unlisted unit trusts and AReits etc.

 

I see, thank you