Smart tax moves

Including ETFs in your portfolio is a strategy that savvy investors are increasingly embracing, recognising the dual benefit of enhanced returns and the potential tax advantages that they offer.

Here are three ways ETFs can potentially serve as tools for managing your tax obligations more efficiently:

1.ETFs offer Lower Capital Gains Tax Liabilities

Understanding the tax efficiency of ETFs and managed funds is crucial for your investment decisions.

Tax efficiency for both investments are mainly affected by trading volume. ETFs, which often follow an index, require less trading — only needed when the index changes. This results in fewer trades compared to actively managed funds, where managers frequently adjust portfolios to pursue higher returns.

For investors, it’s important to know that active management can potentially lead to higher capital gains taxes. In contrast, with ETFs, you only face capital gains taxes when you sell your shares. This difference can significantly enhance the long-term appeal of ETFs due to the more favourable tax treatment.

2.Streaming of Capital Gains Tax Liabilities

ETF streaming emerges as an advanced tactic for efficient capital gains tax management. Unlike traditional unlisted funds, ETFs traded on platforms like the ASX streamline tax liabilities for remaining investors when units are sold, transferring tax gains to ‘Authorised Participants’ upon redemption. This structure ensures a potentially smoother, less taxing experience for ETF investors.

3.Franked Dividends

In the landscape of Australian investing, franked dividends shine as a tax-saving beacon. Accompanied by franking credits, they serve to prevent the double taxation of the same income, and in scenarios where your personal tax rate falls below the corporate rate, they can even potentially catalyse tax refunds, increasing your after-tax income.

If you’re curious about how ETFs can fit into your tax strategy, let’s start a conversation.

At DP Wealth, we’ve experienced firsthand the difference that a well-considered ETF strategy can make come tax time. For us, it’s about working with your accountant and solicitor to leverage every tool at your disposal to meet your financial goals.

Your financial growth is our priority. So, call our office on 4690 2588 for an obligation-free conversation about how ETFs could enhance your investment portfolio and save you at tax time.