Matching Investments to Holding Structure

Investment structure is a crucial consideration when targeting efficient after-tax returns.

Holding structures include fully taxable entities and various forms of tax shelters such as charitable trusts, companies, private ancillary funds, and superannuation funds; which have different tax concessions depending on whether the fund is in accumulation or pension phase.

Matching investments to these different structures can produce significant after-tax benefits. For example:

  • High income generating investments would be more appropriately placed in a lower tax structure, where regular tax liabilities from income generating investments do not occur.
  • The question of whether or not to realise capital gains in a tax-free structure is not influenced by tax considerations, merely by the return prospects of the investment.
  • All other factors being equal, high capital growth investments are best placed in a high tax environment as they produce few tax events until sold, and then often attract tax concessional rates.
  • Companies that are likely to buy back their shares are best held in tax-free or low tax structure where the tax benefit of the buyback can be utilised.
  • Australia’s superannuation system provides a powerful tax shield for investments. Placing income generating investments in these structures aids in enhancing after-tax returns . The situation is similar with capital gains realisation.

Through proactive investment matching with holding structure strategy, tax positions can be managed more effectively.

As an illustrative example, let us consider two scenarios.

In scenario 1, an investor has a personal portfolio and superannuation portfolio with exactly the same holdings, half in high yielding stocks and the other half in high growth stocks.

In scenario 2, an investor also has a personal portfolio and a superannuation portfolio. However, all the high yielding stocks are held in the superannuation portfolio, while the high growth stocks are held in the personal portfolio.

Matching Investments to Holding Structure Tabular Workings

An oversimplified but typical example above illustrates an additional $11,358 in after-tax return through the tax savings achieved with effective matching of investments to the appropriate holding structure. The additional after-tax return represents a risk-free return improvement without changing any underlying investment exposures.

A variety of other scenarios can produce similar benefits, but all tax matters are highly specific to the individual.

1.Investment returns are enhanced through the tax advantaged superannuation structure; however certain types of returns may receive greater tax advantages than others.

Please contact our team for further information of PPMs service offering.

Franklin Djohan
Portfolio Manager
fd@ppmfunds.com
M: 0488 285 654
P: (02) 8256 3777

Private Portfolio Managers Pty Limited ACN 069 865 827, AFSL 241058 (PPM). The information provided in this document is intended for general use only and is taken from sources which are believed to be accurate. PPM accepts no liability of any kind to any person who relies on the information contained in this document. The information presented, and products and services described in this document do not take into account any individuals objectives, financial situation or needs. The information provided does not constitute investment advice. You should assess whether the information is appropriate for you and consider talking to a financial adviser before making any investment decision.  Past performance is not necessarily indicative of future returns. ©Copyright 2017 Private Portfolio Managers Pty Limited ABN 50 069 865 827, AFS Licence No. 241058.

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