Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 347

Top three ways an SMA helps optimise tax

There are few free lunches in investing, so any reward from reducing a tax burden is worth the effort. Financial advisers are increasingly presenting a more tax-effective investment solution to clients as part of their value proposition. The challenge is making sure everyone understands the opportunity.

In this article, we examine how tax optimisation can work using Separately Managed Accounts (SMAs). 

1. Avoid tax inheritance

Investors should avoid the inheritance of a capital gains liability. The chart above shows a hypothetical increase in a managed fund’s unit price over a period that begins when a fund manager buys a stock into that fund, and when it sells that same stock. In the middle of that period, the investor buys units in that fund. The price of that unit has inflated since the stock was originally bought, because it includes the accrued capital gain.

The investor has no choice but to buy into that gain if they want to invest in the fund, even though they were not invested during that initial period. Investors have inherited a capital gain liability. Of course, for the sake of simplicity we have made very simple assumptions, but the concept remains.

For completeness, it should also be noted the opposite is true. If a fund is carrying a capital loss, then the investor can inherit those losses and potentially reduce taxable income, although that is not typically the objective of investing.

The following chart shows what happens with an SMA.

With an SMA, the investor has beneficial ownership of the shares in a portfolio, and that makes all the difference in terms of the tax burden for an individual investor.

If we assume an investment on the same day through the period as in the previous example, the capital gain begins from the day of investment, and not the start of the period. The managed account structure means investors are buying shares in their own name, rather than units in a fund carrying capital gains. They will avoid inheriting a capital gains liability. All other things equal, the tax burden should be lower.

2. In specie transfers

Another way to optimise tax is to transfer stock holdings into the SMA via an in specie transfer, which saves selling down assets and avoids a capital gains liability even before the new investing takes place.

In the example above, an investor holding ANZ moves their investment into an SMA which also holds ANZ alongside other stocks. The key point here is through a transfer, the amount of selling is minimised through the transition into the SMA.

The opposite also works. An investor moving out of an SMA may decide to keep ANZ and sell out of the rest. That may reduce the tax burden on the way out.

Logistically, the ‘in specie’ stock transfer is typically nominated during the platform application process. The adviser (on behalf of the client) will nominate where in specie transfers apply, saving the investor any avoidable capital gains.

And by avoiding the trade, the investor also saves on brokerage costs. 

This is the advantage of having beneficial ownership of shares. The same outcome is generally not possible with managed funds.

3. Manage individual holdings

As a beneficial owner of stocks, SMAs also allow investors to manage their holdings in a way that optimises their personal tax position. An investor can elect to hold or sell parcels of stock depending on their overall tax position. For example, a gain on one parcel may be used to offset a loss on another, and so on. This technique of splicing individual parcels is generally not available in a managed fund arrangement.

Managed funds have their benefits too

While the examples above highlight some examples of tax advantages of SMA over a managed fund, there are still plenty of reasons a managed fund arrangement may be suitable for other investors.

For example, there are more investment options available in the managed fund space, especially if the investor has a specific portfolio need such as in an illiquid investment or a low-risk equity income strategy. Many of these are not offered in an SMA.

 

Andrew Stanley is Head of Australian Equities at Ralton Asset Management. This article is general information and does not consider the circumstances of any investor, and SMAs are usually available only through a financial adviser.

 

RELATED ARTICLES

Nine rules to guide you to die with zero

How a carer inherited an estate

banner

Most viewed in recent weeks

Why the $5.4 trillion wealth transfer is a generational tragedy

The intergenerational wealth transfer, largely driven by a housing boom, exacerbates economic inequality, stifles productivity, and impedes social mobility. Solutions lie in addressing the housing problem, not taxing wealth.

The 2025 Australian Federal election – implications for investors

With an election due by 17 May, we are effectively in campaign mode with the Government announcing numerous spending promises since January and the Coalition often matching them. Here's what the election means for investors.

Finding the best income-yielding assets

With fixed term deposit rates declining and bank hybrids being phased out, what are the best options for investors seeking income? This goes through the choices, and the opportunities and risks involved.

What history reveals about market corrections and crashes

The S&P 500's recent correction raises concerns about a bear market. History shows corrections are driven by high rates, unemployment, or global shocks, and that there's reason for optimism for nervous investors today. 

Howard Marks: the investing game has changed

The famed investor says the rapid switch from globalisation to trade wars is the biggest upheaval in the investing environment since World War Two. And a new world requires a different investment approach.

Welcome to Firstlinks Edition 605 with weekend update

Trump's tariffs and China's retaliatory strike have sent the Nasdaq into a bear market with the S&P 500 not far behind. What are the implications for the economy and markets, and what should investors do now? 

  • 3 April 2025

Latest Updates

Investment strategies

4 ways to take advantage of the market turmoil

Every crisis throws up opportunities. Here are ideas to capitalise on this one, including ‘overbalancing’ your portfolio in stocks, buying heavily discounted LICs, and cherry picking bombed out sectors like oil and gas.

Shares

Why the ASX needs dual-class shares

The ASX is exploring the introduction of dual class share structures for listed companies. Opposition is building to the plan but the ASX should ignore the naysayers and bring Australia into line with its global peers.

The state of women's wealth in Australia

New research shows the average Australian woman has $428,000 in net wealth, 40% less than the average man. This takes a deep dive into what the gender wealth gap looks like across different life stages.

Investing

The two most dangerous words in investing

Market extremes are where the biggest investment risks and opportunities lie. While events like this are usually only obvious in hindsight, learning to watch out for these two words can alert you to them in real time.

Shares

Investing in the backbone of the digital age

Semiconductors are used to make microchips and are essential to a vast range of technology and devices. This looks at what’s driving demand for chips, how the industry is evolving, and favoured stocks to play the theme.

Gold

Why gold’s record highs in 2025 differ from prior peaks

Gold prices hit new recent highs, driven by a stronger euro, tariff concerns, and steady ETF buying – all while the precious metal’s fundamental backdrop remains solid amid a shifting global economic landscape.

Now might be the best time to switch out of bank hybrids

In this interview, Schroders' Helen Mason discusses investing in corporate and financial credit securities, market impacts of tariffs, opportunities for cash investments, and views on tier two and hybrid bonds.

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.