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Re: Investor versus trader - managed funds and investments

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Initiate

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This may seem like an inane question, but here I go.

I am fully aware of the ATO's definition and distinction between share trader and share investor, and how this impacts taxation.

For example, a share trader is able to book profits from the sale of shares as income, rather than capital gains, and vice versa. A share trader can also use associated costs as a deduction on income, rather than alter the cost base of the asset.

I am also aware that certain listed investment companies, such as AFIC, Argo etc. are recognised as investor based LICs and have certain concessions for distributing discounted capital gains.

Conversely, the majority of LICs are considers traders and are not permitted to distribute capital gains to investors.

My question is this:

Why do high turnover managed funds, which predominantly book profits through the sale of shares, designate such sales as capital gains when distributing them to unit holders?

Given the differentiation between investor and trader, I would have assumed such sales would be booked as income and distributing accordingly, rather than capital gains. After all, they are in the business of making money from the buying and selling of shares.

I am most likely missing something. I just can't work out why, given the concessions for traders, these are being booked as capital gains, rather than income.

 

In summary, why do manged funds categorise sales of shares as capital gains/losses rather than income, considering they meet (a large majority) the definition of a trader? Why aren't share sales considered merely income of their business operation. 

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Best answer

Initiate

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Apologies, I have received the correct advice and it relates to a capital treatment election to the ATO by a managed investment trust.

It doesn’t relate to the fund holding funds on behalf of investors to obtain dividends Etc.

https://www.ato.gov.au/General/Trusts/In-detail/Managed-investment-trusts/



7 REPLIES 7
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Enthusiast

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This is just a comment. As a Trader (once upon a time) I ended doing so with a LOSS. As it was INCOME each following year this C/F (carried forward) LOSS was reduced by ANY INCOME I made in the following year(s). Which was below the tax threashold. So I gained zero tax benefit. I should have not gone to the extraordinary and very difficult extent I did to achieve TRADER (in the Business of) status recognition from the ATO. If I had not, I could have Carried Forward those losses as Capital Losses. And they would have eventually reduced my future Cap. Gains. Assuming, in my situation that I was not legally obliged to notify the ATO my activity was in the nature of carrying on a business. I seem to recall that the application process was for the privilege of being granted (by the ATO) trader (carrying on a busineess) status. Even now I'm unsure I was legally obliged. Or could have elected to assume the status of Investor. In hindsight it was a financial mistake. As to your question "why" the difference. I suspect nobody knows. The Parliament that considered and passed the tax laws would have known (why). A long time ago. I CONTRIBUTE THIS COMMENT WITHOUT ANY POLITICAL INTENTION. Just the facts as I have experienced them. I doubt the ATO "can" say why. And any attempt may be, or become political. Even any response whatsoever. And that's about it. For now. 

PS: This comment is a rare event by me. I am not a part of any ATO Team. Only your probable peer.

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Initiate

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Appreciate the effort, but my question does not relate to a person’s trader or investor status.

My question is in relation to professionally managed funds. I am wishing for clarification on why a managed fund is distributing capital gains to investors on account of them selling out of share positions.

Given they are in the business of trading, I would have assumed sales of shares would be booked as income, not capital gains, and distributed accordingly.

To clarify, I am not seeking an explanation between investor and trader, and how this affects taxation. I understand this already. What I don’t understand is why managed funds, especially those in the business of trading in and out of positions, are categorising sales as capital gains and distributing such to beneficiaries. To me, this doesn’t make sense, as the amounts made should be booked as income on account of their trader status.
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Enthusiast

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You're welcome. Maybe in 100 years the tax laws will be simplified. I look forward to seeing that happen. Then maybe an employer can pay you 1 year later and you can get a 50% tax discount....Smiley Happy

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Initiate

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The whole system is based on unnecessary complication. It could be simplified tomorrow, if there was appetite. Sadly, too many vested interests in keeping it as complicated as possible. What would KPMG, PWC do if there was a simplified and coherent tax system...
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Enthusiast

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Agreed.

This is my last comment. As this blog is strictly not political. And speaking as a working class person (intellectually), I find this quote from an above comment interesting. Quote: "The fact that this may occur over a short period of time does not discount the intent and purpose of the transaction". I continually fail to understand why "intent aka intension" and "purpose - the purpose of my scheming" can not be eliminated as factors determining (at the end of the day) the final tax owing - aka tax burden. As far as I can see, CGT (capital gains tax) has been set free from intention and purpose. You own a CGT asset? You pay CGT upon a CGT event. With defined exceptions. Same - for your wages. You earn a wage, you pay income tax. If we threw in intention then maybe we could make employment subject to this test (this is a joke - it's not political). If you live to work then you pay income tax. But if you work to live you get a 50% discount. Or maybe the other way around? 

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Devotee

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The purpose of managed funds is to utilise unitholder capital and to hold (capital) assets to derive (dividend/distribution) income and increase the value for the unitholders of the fund. The sale is based around the "natural" (read: market's) increase in value of the asset - a capital gain. The fact that this may occur over a short period of time does not discount the intent and purpose of the transaction.

 

As such, the funds are not running a business of share trading (I would say they are in the business of managing funds on behalf of investors - hence they may charge a management fee). This is notwithstanding the point that they make large volumes of trades or trades of significant value.

 

This is also the preferred approach since the 50% CGT discount is very attractive.

 

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Best answer

Initiate

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Apologies, I have received the correct advice and it relates to a capital treatment election to the ATO by a managed investment trust.

It doesn’t relate to the fund holding funds on behalf of investors to obtain dividends Etc.

https://www.ato.gov.au/General/Trusts/In-detail/Managed-investment-trusts/