Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 219

Investors face new choices in listed vehicles

The market capitalisation of listed investment companies (LICs) and listed investment trusts (LITs) on the ASX reached almost $35 billion in July 2017, up 12% from the previous year. What is driving the interest and what are the fundamental differences between these structures?

LICs and LITs popularity boost

While LICs have traded on the ASX for nearly 100 years, it is only relatively recently that a wide range of investors have taken advantage of their benefits, spurred on by regulatory changes and market conditions.

One of the key factors driving the increased interest was the introduction of the Future of Financial Advice (FoFA) legislation in 2013. FoFA abolished the generous upfront trail and soft commission structures that had, until then, been enjoyed by advisers who recommended their clients into managed fund products. This directly resulted in an uplift in appetite from investment managers, financial advisers and investors in using LICs.

The number of LICs listed on the ASX now exceeds 100, double that of five years ago. While many people are familiar with LICs, LITs are less well known and less common in the Australian market.

So, what is the difference between LICs and LITs and what does it mean for investors?

LICs and LITs give exposure to a broad range of assets in one transaction. Both are traded on the ASX, which is appealing to a lot of self-directed and SMSF trustees.

Unlike a managed fund, however, their assets are held in a closed pool, which means they usually don’t issue new shares or cancel existing shares as investors join or leave. If investors want to exit, they have to sell their shares (or units) on the stock exchange. They can’t be redeemed.

Differences between LITs and LICs

The biggest difference between LICs and LITs lies in the way they are structured. A LIC is a company, which pays dividends to investors, whereas LITs are incorporated as trusts and must pay out any surplus income to investors in the form of distributions.

Some of the fundamental differences include:

Tax transparency

A LIC treats the dividends from underlying investments and capital gains as income on its profit and loss statement. The LIC then deducts operating costs to derive a profit before tax figure. This is then taxed at the company rate before dividends are paid.

By contrast, a LIT more closely represents an unlisted managed fund in that all net income and realised capital gains must be distributed on a pre-tax basis, and the end investor pays any taxation.

Capital gains tax treatment

A major advantage of the way LITs are taxed is most individual investors will be eligible for discounted capital gains tax concessions applicable to investments held for more than 12 months.

Corporate entities are generally not eligible for this discount, although some LICs may qualify for a concession from the Australian Tax Office to pass on this benefit to shareholders.

Ability to pass through income can lead to predictable returns

A LIT may also provide the manager with more flexibility in paying distributions, allowing them to pay out more than the underlying income levels, through a return of capital. This can be useful when the manager wants to pay out a set portion of the fund each year, to give investors a predictable income stream.

By comparison, a LIC is limited by its ability to pay dividends, requiring the accumulation of retained profits before a dividend can be paid.

With an ageing demographic of investors who will be increasingly focused on income, it is likely that more LITs will come to the market as more investors grow to understand the structure of these products and realise their advantages.

Whether investors choose to invest in a LIC or a LIT, or both, it is highly likely the growth of the market is set to continue.

 

Andrew Lockhart is a Managing Partner at Metrics Credit Partners (MCP), an Australian debt-specialist fund manager. MCP is offering investors exposure to the corporate loan market through the MCP Master Income Trust, which will list on the ASX soon. This article is general information and does not consider the circumstances of any investor.

 

RELATED ARTICLES

Why LICs are closing and more should follow

Is now the time to invest in small caps?

The catalyst for a LICs rebound

banner

Most viewed in recent weeks

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Are franking credits hurting Australia’s economy?

Business investment and per capita GDP have languished over the past decade and the Labor Government is conducting inquiries to find out why. Franking credits should be part of the debate about our stalling economy.

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

Latest Updates

Investment strategies

9 winning investment strategies

There are many ways to invest in stocks, but some strategies are more effective than others. Here are nine tried and tested investment approaches - choosing one of these can improve your chances of reaching your financial goals.

Planning

Super, death and taxes – time to rethink your estate plans?

The $3 million super tax has many rethinking their super strategies, especially issues of wealth transfer on death. This reviews the taxes on super benefits and offers investment alternatives.

Taxation

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

Shares

The megatrend you simply cannot ignore

Markets are reassessing the impact of AI, with initial euphoria giving way to growing scepticism. This shift is evident in the performance of ASX-listed AI beneficiaries, creating potential opportunities.

Gold

Is this the real reason for gold's surge past $3,000?

Concerns over the US fiscal position seem to have overtaken geopolitics and interest rates as the biggest tailwind for gold prices. Even if a debt crisis doesn't seem likely, there could be more support on the way.

Exchange traded products

Is now the time to invest in small caps?

With further RBA rate cuts forecast this year, small caps may be key beneficiaries. There are quality small cap LICs and LITs trading at discounts to net assets, offering opportunities for astute investors.

Strategy

Welcome to the grey war

Forget speculation about a future US-China conflict - it's already happening. Through cyberwarfare and propaganda, China is waging a grey war designed to weaken democracies without firing a single shot.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.