Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 231

LICs: Traders versus investors for tax purposes

The introduction of the Future of Financial Advice (FOFA) reforms and the increase in SMSFs has seen listed investment companies (LICs) surge in popularity over recent years. Investors can gain exposure to a diverse portfolio of assets through around 100 LICs listed on the ASX. These LICs can be categorised in various ways, including by their asset class, market cap of investee companies, investment style, and whether they are internally or externally managed.

Not commonly discussed is the distinction between LICs that are deemed by the ATO to be ‘investors’ for tax purposes, versus LICs that are ‘traders’. The key differences between these two types of LICs relate to tax, franking, and dividends.

Investors for tax purposes

Many of Australia’s older LICs are investors for tax purposes. These include AFIC (ASX: AFI), which was established in 1928, and Argo Investments (ASX: ARG), founded in 1946. Investors for tax purposes tend to buy investments and hold them for the medium-to-long term. To maintain their status as an investor for tax purposes, these LICs generally turnover 10% or less of their investment portfolios each year. This type of LIC is typically suited to investment managers with a long-term investment horizon and low portfolio turnover.

For accounting purposes, LICs that are investors for tax purposes record movements in the value of their investment portfolios through the balance sheet, rather than the profit and loss statement.

Tax and franked dividends

The franked dividends these LICs pay shareholders are primarily derived from franked dividends received from the companies in the investment portfolio. These dividends are sometimes called ‘flow through’ dividends. When a LIC which is an investor for tax purposes realises (sells) an investment for a capital profit, the LIC can potentially pay a dividend to shareholders that includes a capital gain component. This is called a LIC capital gain dividend. This allows shareholders to claim the capital gains tax (CGT) discount as though they directly owned and sold the shares in the LIC’s underlying investee company. Over and above the benefit of franking flowing through the cash yield paid by the LIC, the capital gain component can be used to further reduce shareholders’ tax liability.

Traders for tax purposes

Many of the ASX's newer LICs are traders for tax purposes. These include the LICs we manage at Wilson Asset Management, such as WAM Capital (ASX: WAM) and WAM Leaders (ASX: WLE). LICs that are traders for tax purposes typically have higher turnover of their portfolios and are often employed by managers with a more active investment style.

LICs that are traders for tax purposes record mark-to-market movements in the value of their investment portfolios through the profit and loss statement, as opposed to the balance sheet.

Tax and franked dividends

Traders for tax purposes can pay dividends out of profits from realised gains, mark-to-market movements in the value of the investment portfolio and dividend income from investee companies. This increases their ability to pay a steadily-increasing stream of fully franked dividends which is particularly appealing to SMSF investors seeking a consistent yield.

Traders for tax purposes rely predominantly on paying corporate tax on realised gains to generate franking credits to attach to dividends paid to shareholders. These LICs derive some additional franking and dividend income from Australian investee companies in their portfolio.

Summary of key differences

  Investors for tax purposes Traders for tax purposes
Turnover Typically low turnover of investment portfolio (below 10% p.a.) Higher turnover of investment portfolio
Portfolio movements Movements in the value of their investment portfolios through the balance sheet Mark-to-market movements in the value of their investment portfolios through the profit and loss statement
Franking credits Franking credits primarily generated from investee companies Franking credits primarily generated by paying corporate tax on realised gains
Sources of dividend payments Primarily derived from dividends received from investee companies Derived from dividends received from investee companies, realised gains, and mark-to-market movements on the investment portfolio
LIC capital gain dividend Can pay a LIC capital gain dividend Cannot pay a LIC capital gain dividend

Implications for investors

These different types of LICs provide advantages and disadvantages for shareholders and investment managers alike.

Investors should consider their financial objectives and circumstances, including tax implications of owning shares in each type of LIC. While investors for tax purposes and traders for tax purposes are distinct from one another in some regards, both offer the benefits of the LIC investment structure which make them popular with investors. These benefits include the ability to pay a steadily-increasing stream of fully franked dividends, transparency, accountability, and a closed-end pool of capital allowing the investment manager to make rational investment decisions.

[Register for our free weekly newsletter and receive our latest ebook, Cuffelinks Showcase]

Chris Stott is the Chief Investment Officer of Wilson Asset Management. This article is for general information only and does not consider the specific circumstances of any individual.

 

  •   14 December 2017
  • 7
  •      
  •   
7 Comments
Doug
December 14, 2017

Can you explain how mark to market movements generate franked dividends?
Thanks,
Doug

Graeme
December 14, 2017

Para. 2 indicates that it is the ATO that determines whether a LIC is a trader or investor for tax purposes. Do they decide this every year based on portfolio turnover for the latest financial year?

WAX was an investor up to and including 2013/14 and has been a trader each year since. Does this mean they have had a higher portfolio turnover for each of the last three years than 2013/14 and prior years? Would WAX be deemed to be to an investor for any low turnover year in the future?

Tom
December 14, 2017

Thanks Chris - good comparison. So if trading LIC's basically manufacture their yield, how sustainable is that in a market downturn?

Simon
December 14, 2017

Good point Tom. If and when we get to the point where there aren't enough profits to pay the dividends, those LICs trading at big premiums to NTA will swing to discounts, thereby inflicting a double whammy hit to shareholders - reduced or no dividend, and big capital erosion. Could end up like the way things panned out for Telstra holders who thought the dividend was bulletproof....

Graeme
December 16, 2017

Simon; Like all shares, the 'price' of a listed fund will usually trade at a premium or discount to its 'value', sometimes large. Even the non-trading ones may trade at a discount, albeit a smaller one, if dividends in general are cut, or even just not expected to grow in a recession. One of the charms of listed funds is to be able to take advantage of this. If you're worried about a "double wammy hit", then buy an unlisted fund.

Richard M
December 15, 2017

How does an intending purchaser of LIC shares determine whether the LIC is a trader for tax purposes or an investor?

Graeme
December 16, 2017

Best bet Richard is to contact the manager and ask them. They may, however, only be able to answer what historically has been the case, hence my questions above.

 

Leave a Comment:

RELATED ARTICLES

The missing 30%: how LIC returns are understated, and why it matters

Why LICs may be close to bottoming

The fascinating battle between Nick Bolton and Magellan

banner

Most viewed in recent weeks

Testamentary trusts post-budget: Estate planning, tax reform and the ‘death tax’ debate

Proposed Budget changes to taxation are casting new uncertainty over testamentary trusts, prompting closer scrutiny of estate planning structures and the real implications of reforms still taking shape.

High quality businesses are on sale

Beneath the dominance of the ASX's largest stocks, much of the market has been left behind. High-quality companies are now trading at levels rarely seen, offering opportunities for investors willing to look deeper.

Meg on SMSFs: The CGT changes don’t impact super but what about Div 296 tax decisions?

New CGT rules could tip the scales in the super vs non-super debate. For those facing the Division 296 tax, the case for withdrawing has gotten more complex. A "comparison rate" tool may help assess decisions.

The strange effect of the 30% minimum capital gains tax

The 30% minimum tax on capital gains sits at the heart of the budget's proposed reforms. Yet the mechanics reveal anomalies that introduce unexpected distortions that raise questions about its design.

Ranking three common retirement strategies

The defining challenge of retirement isn't just about building wealth, it's about converting your lifetime savings into sustainable income. A holistic understanding of different strategies can improve long-term outcomes.

Welcome to Firstlinks Edition 667 with weekend update

The downfall of the giant and three lessons for investors.

  • 18 June 2026

Latest Updates

Planning

Does your will qualify for the discretionary testamentary trust exemption?

Treasury has confirmed the exemption many families were hoping for. But buried in the fine print are two conditions that could leave some wills on the wrong side of the exemption, despite years of careful planning.

Lithium's latest drop and what it means for ASX investors

Lithium's latest sell-off has punished ASX miners as prices remain hostage to shifting expectations. The key challenge is navigating a market prone to extreme volatility despite a strong case for the long-term demand outlook.

Investment strategies

CGT reform and fund turnover: who really feels the impact?

The implications of CGT reform are far and wide. As the 50% discount gives way to inflation indexation, turnover and return profiles may become critical drivers of after-tax performance. Some strategies face a far greater hit.

Superannuation

Super was built for a very different Australia

Our retirement system was built around assumptions that no longer hold. Lower homeownership, longer lifespans and changing expectations are exposing cracks that policymakers and super funds need to address.

Retirement

Retirement in reality - 4 months in

Many people spend years planning financially for retirement but little time preparing for what comes next. Four months in, here are the surprising lessons I've learnt on finding purpose, social connection and healthy habits.

Investment strategies

After the Budget, Australia needs its own definition of quality

As tax reforms reshape investment incentives, investors should rethink what quality investing means in the uniquely concentrated Australian market, where traditional frameworks may not translate as effectively.

Datacenters are the new shale oil

Why are tech giants pouring billions into datacentres when the economics look questionable? The most dangerous words in investing may be: "everyone else is doing it". Today's AI boom has striking parallels with the shale bust.

Sponsors

Alliances

© 2026 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.