| Listed Investment Companies can provide taxation
advantages to individual investors. The net income of the LIC is taxed
at the 30% taxation rate and the net income plus franking credit is
passed on to investors. With some LICs capital gains may be returned
gross to shareholders, who are liable for capital gains tax. Many LICs
used ‘buy and hold’ investment strategies which reduce realized
capital gains, and those capital gains are typically eligible for the
50% capital gains tax concession. An example of this is where a LIC
sells some shares that it has held for more than 12 months, producing
an eligible capital gain of $100. The LIC pays tax on that gain at the
corporate taxation rate of 30%, leaving $70 to distribute to
shareholders. The shareholders add the net dividend of $70 to the
imputation credit of $30 (for the tax already paid). Therefore, the
grossed-up gain is $100. However, due to the CGT concession,
shareholders calculate tax on only $50 (half the gain) at their
marginal rate of tax. If a shareholder is at the top marginal taxation
rate (48.5% including the Medicare levy), then the tax payable comes
to $24.25. This figure is then subtracted from the imputation credit
($30), to arrive at a total tax credit of $5.75. You should consult a
qualified advisor to assess how these tax treatments affect your
situation.
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