SMAs are more tax-efficient than managed funds: Crystal Wealth

Managed accounts in the form of IMAs, SMAs or MDAs are re-emerging as a more transparent, controllable, flexible and tax-efficient way of investing than managed funds, says John McIlroy executive director of Crystal Wealth Partners.

With full legal ownership of a ‘professionally managed’ portfolio of stocks resting with the investor under a managed account structure – unlike the pooled managed fund model – it has the potential to deliver superior after-costs and after-tax performance outcomes.

Given that investors retain beneficial ownership of the investments, there’s considerably greater flexibility in selecting appropriate tax accounting methodology to optimise their after-tax outcome, plus greater customisation of the overall portfolio to better suit their personal preferences and goals.

The complete separation of an individual (managed account) portfolio – from other investors using this structure – means each investor’s tax position isn’t negatively compromised by the actions of other investors also engaged in the same managed account service.

Investors are directly entitled to all income and dividends, including franking credits arising from the investment held on their behalf. Considering investor preference for investing in direct shares, managed accounts are also proving to be a popular solution for SMSF trustees

By using managed accounts, (all) investors avoid unrealised gains and losses of other investors that can arise within pooled structures. For example, managed funds may crystallise capital gains when selling assets to pay out investors who have redeemed from the fund, thereby potentially creating an after-tax cost to all investors. Through managed accounts, investors are able to individually manage the capital gains position of a portfolio and plan to offset gains against losses to minimise total overall investment related tax on a personalised basis.

For example, when investors partially sell a holding within a managed account structure they can determine which part of the holding is sold by nominating a preferred tax method, thereby potentially minimising total capital gains tax.