Asset location

Question

Hi folks,

I'm new and need advice on asset location. Should I hold Australian or international shares inside super or in a taxable investment account like Pearler? I'm a high-rate taxpayer with a buy-and-hold strategy until retirement.

Considering tax on dividends and CGT, I'm thinking of putting VGS in the Vanguard account and Australian shares in super for franking credits.

Am I on the right track?

Thanks!

Answer

Hello!

It’s great to see you’re thinking strategically about asset location based on tax efficiency and your investment strategy. Your approach of considering both the tax implications of dividends and capital gains tax (CGT) is wise, especially as a high-rate taxpayer with a long-term buy-and-hold strategy.

Holding Australian shares in your superannuation can indeed be beneficial due to the franking credit system. Franking credits (also known as imputation credits) can offset the tax payable on dividends, which can be particularly advantageous if held within a super fund where the tax rate is capped at 15% for accumulation phase. This is typically lower than personal income tax rates, thus potentially enhancing the after-tax return on Australian equities.

On the other hand, placing international shares like the Vanguard Global Shares Index (VGS), which holds a diversified portfolio of international equities, in a taxable account can also make sense. International shares do not benefit from franking credits, and by holding them outside of super, you may have more flexibility in terms of access and control. However, it’s important to consider the potential tax implications, such as foreign withholding taxes and the absence of franking credits.

Regarding your question about ETFs domiciled in Australia but holding non-Australian assets, such as IVV which tracks the S&amp;P 500 and is domiciled in Australia, there can indeed be some level of tax drag. This is due to withholding taxes on dividends from the underlying US stocks. However, Australian-domiciled ETFs often have mechanisms to reduce this impact, and you can also claim a foreign income tax offset on your Australian tax return, which can help mitigate the effect of international withholding taxes.

In summary, your strategy of placing Australian shares in super for the franking credits and international shares in a taxable account seems sound, especially considering your tax bracket and investment horizon. However, it’s always good to review such strategies with a financial advisor or a tax professional to tailor the approach to your specific circumstances and ensure it aligns with your overall financial goals.

Pearler can be a useful platform for implementing your investment strategy, offering a straightforward way to buy and hold shares, both Australian and international. Pearler’s focus on long-term investing aligns well with your buy-and-hold approach, making it a suitable choice for managing your investments efficiently.

Feel free to explore more about how Pearler can assist in achieving your investment objectives, and consider how the platform’s features can complement your strategy for asset location and tax efficiency.

You can find out more about this topic here: January Investing Q And A

Disclaimer

I am an AI-powered chatbot and not a financial advisor. The information provided is for educational and informational purposes only and should not be considered as financial advice. Investing involves risks, and past performance is not indicative of future results. It is important to conduct thorough research and consider your own financial situation and risk tolerance before making any investment decisions. It is always recommended to consult with a qualified financial advisor or professional before making any investment decisions.

Answer

Hi Anjali.

Great question.

People tend to approach this very differently from one another here for various reasons, so you won’t find a universal answer.

But with a scenario like this, with a high tax rate, holding until retirement and not planning to use the portfolio for a long time, it generally would make sense to have the higher income assets in a lower tax environment, and the lower income assets outside super.

So I’d say that you’re definitely on the right track there.

If, however, there is a plan to utilise the portfolio and its income/growth earlier than that, then a more even split could make sense.  Especially in a situation where one expects to be in a low tax environment – like early retirement – possibly decades before official retirement (at age 60+).  In this case, it can make sense to hold the higher income assets outside super, since that will result in a favourable tax outcome thanks to franking credits (better than super).

Hope that’s useful.

Answer

Hi Anjali, i suggest going into your super account and looking at what’s it investing in. If it’s a generic balanced or high-growth investment strategy, it will most likely already be investing in a diverse portfolio of Australian and International shares and a small allocation (10%-20%) to defensive assets such as bonds. Outside of Super it’s really up to you what you want to invest in, what your objectives are and for how long you plan to stay invested. Since you mentioned you’re a high-rate taxpayer, i would generally avoid investing in high dividend paying shares and ETF’s as the CGT on your already high-tax rate could be quite brutal and tax inefficient. I’d personally look at something more international that’s focused on growth rather than dividends, such as VGS or IVV to start. Your best bet is to talk to a financial advisor who can really help sort you out and put you on the right path.

Cheers,
Amar

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DIVIDENDS AND TAX

Anjali Patel.

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