Listed Investment Companies

A Listed Investment Company (LIC) is an Australian resident company, listed on the Australian Securities Exchange (ASX), which carries on the business of managing an investment portfolio. LICs offer investors exposure to a diverse and professionally managed portfolio of assets, similar to those found in many unlisted managed funds. Examples of assets may include Australian shares, international shares and infrastructure assets.

To determine whether an investment is classified as a LIC, investors should check the LIC classification list which is published on the ASX website.

View the LIC classification list as at June 2014.

LICs are companies traded on the ASX where the share price is determined by the market.  They are closed-end structures which allow the fund manager to concentrate on investment selection without having to factor in the possibility of money coming into or leaving the company.

In order for a company to be treated as a LIC for tax law purposes it must have at least 90% of the market value of its capital gains tax (CGT) assets made up of the following permitted investments:

  • shares, units, options, rights or similar interests
  • financial instruments such as loans, debts, debentures, bonds, promissory notes, forward contracts or futures contracts, currency swap contracts and a right or option in respect of a share, loan or contract
  • asset types whose main use by the company in carrying on its business is to derive interest, an annuity, rent, royalties or foreign exchange gains.

LICs manage an investment portfolio to generate income from their investments. Typically, the main types of income they may derive from their investments are:

  • interest
  • dividends (franked and unfranked); and
  • capital gains on the sale of underlying investments.

LICs pay tax on any income they derive at the company tax rate of 30% and typically distribute franked and/or unfranked dividends to investors.

  1. CGT discount
    The CGT discount is not generally available to companies in respect of any net capital gains they may derive. However, when a LIC derives a capital gain in respect of an asset which has been held for 12 months or more, a special tax treatment may allow the benefit of the CGT discount to flow through to investors (this is achieved via a special treatment of relevant parts of dividend distributions – see below). This treatment provides a broadly similar outcome to any discount a shareholder could have claimed had they owned the underlying asset directly and made a subsequent capital gain.
  2. Dividend income
    Upon payment of dividends, LICs must separate that part of the dividend which relates to capital gains on assets held for more than 12 months.  Dividends sourced from such LIC capital gains are referred to as the “attributable part”. Australian resident individuals and trusts are able to obtain a tax deduction equal to 50% of the attributable part of the dividend. A 33⅓% deduction referrable to the attributable part of the dividend is available to complying superannuation funds. Franking credits may be available where the dividend is franked.

Where applicable, the Tax Report – Summary and Tax ReportDetailed  show the amount of the dividend plus the amount of the attributed capital gain as a franked dividend. Also reported will be the franking credits that the LIC has distributed, if any.

The amount of the allowable deduction associated with the attributable part of a LIC distribution is 50% of the attributed capital gain. This will be reported under the Expenses Paid column of the Tax Report – Detailed and under Other in the Expenses section of the Tax Report – Summary.

Where the investor is a self-managed superannuation fund (SMSF), the investor will need to double the amount disclosed in the Expenses Paid column of the Tax Report – Detailed for each LIC distribution and multiply this amount by 33⅓% to obtain the amount of the deduction that they may be able to claim in their income tax return.

Example: an investor receives a dividend per share of 16 cents and they hold 1,000 shares. The distribution statement discloses that the LIC capital gain is $60. The final dividend is 100% fully franked. How will Wrap report this where the investor is an individual and where the investor is an SMSF?

Where the investor is an individual, the distribution will be reported as follows:

  • an amount of $160 will be disclosed on the Tax Report – Summary and the Tax Report – Detailed as a fully franked dividend. This will need to be disclosed as an assessable dividend in the individual’s income tax return.
  • an amount of $68.58 will be disclosed on the Tax Report – Summary and the Tax Report – Detailed as a franking credit ($160 * 30/70). This may need to be disclosed as an allowable franking credit in the individual’s income tax return.
  • an expense of $30 ($60 * 50%, with the 50% rate reflecting the CGT discount available to individual residents) will be disclosed under the Expenses Paid column of the Tax Report – Detailed and under Other in the expenses section of the Tax Report – Summary. This may need to be disclosed as an allowable deduction in the individual’s income tax return.

Where the investor is an SMSF, the distribution will be reported as follows:

  • an amount of $160 will be disclosed on the Tax Report – Summary and the Tax Report – Detailed as a fully franked dividend. This will need to be disclosed as an assessable dividend in the fund’s income tax return.
  • an amount of $68.58 will be disclosed on the Tax Report – Summary and the Tax Report – Detailed as a franking credit ($160 * 30/70). This may need to be disclosed as an allowable franking credit in the fund’s income tax return.
  • an expense of $30 ($60 * 50%) will be disclosed under the Expenses Paid column of the Tax Report – Detailed and under Other in the expenses section of the Tax Report – Summary.
  • to calculate the amount of the deduction to which the SMSF may be entitled, it will need to multiply the $30 by two (i.e.  gross up the deduction to reflect the gross LIC gain of $60) and multiply this amount by 33⅓% (i.e.  apply the SMSF CGT discount of 33⅓% resulting in a $20 deduction). The $20 may need to be disclosed as an allowable deduction in the fund’s income tax return.

No – the dividends an investor receives from a LIC are considered assessable income for tax purposes rather than capital gains. As such, any capital losses an investor may have (either inside or outside of our platform) cannot be applied to reduce the amount of an attributed capital gain.

Where an investor holds their shares in a LIC as a capital asset, any gain or loss on disposal may be subject to CGT. If the shareholder has held their shares in the LIC for at least 12 months, the resulting capital gain can be reduced by the CGT discount (50% for individuals and trusts and 33⅓% for compliant superannuation funds).

The entire amount of the distribution from a LIC should be included in an investor’s income tax return as a dividend.