Managed Funds Margin loans with managed funds

Hi

I am exposed to tax liability in following sceneraio and am not sure if the fund manager is treating me correctly or not:
1. I invested about $100k in 1995 with a fund manager (fm)
2. In June 2007, I used these funds and raised margin loan with a loan provider (LP).
3. In June 2008, I paid back fully money to LP who promptly informed fm
4. I then received instruction from fm that I needed to open a new account to have these funds invested.
5. I spoke to my accountant and his view is that the tax office will treat the new account as new investment and treat as if I had redeemed the first investment and I will be up for tax liability.

My problem is that I had done this with two fund managers and only one of them is asking for a new account to be opened.

Looks to me not only margin loan providers are all different (Opes etc), the fund managers treat them differently. We all know the grief to the investor the differences in providers caused. Are the authorities waiting similar from fund managers?


Any help will be greatly reduce my high stress level.

 

once you redeem units from a managed fund, you automatically trigger a capital gain, regardless if the account is closed or not.

 

I have not redeemed the units. The fm is asking me to open a new account.

 

how can the fund manager ask you to open a new account? if the account is still open? with units in it?

If you pay out a margin loan, that has nothing to do with the fund manager, they wont even know if you owe money or not. they will just see its held with x margin loan, which may have nil balance.

 

You may be on to some thing. The funny thing is that in one case you end up with unintended capital gains liability and in other you are not. None of this is disclosed in PDS and as far as I know none of the authorities are doing any thing about this trap.
In my mind, as there was no change in beneficial ownership or relationship between the fm and me. Therefore there is no need to get whacked with capital gains.

 

thats interesting, cause you can 'transfer in' existing shares or managed funds, so how can ownership change?

 

When you take about a margin loan, the lender needs a way of making sure that you don't sell the stocks/units you have provided as security and take off with the cash without paying back your loan. With shares, the margin lenders use the Chess system to control your sales. The lender will either insist that you transfer Chess sponsorship to them - that way they can ensure the funds of any sales go into your lending account. Or else, if your current Chess sponsor has an agreement so settle with another margin lender, they will let you leave your shares with your own sponsor, and your own sponsor will send the proceeds of any sales over to your margin lender so it can be applied to your loan account.

With managed funds, things are different because there is no standard Chess system in place. However, your margin lender still wants to ensure you don't sell and run with the cash. There are two systems that operate depending on the managed fund and the margin lender. The first system is you sign over power of attorney of your affairs over to your margin lender. Your margin lender then contacts your managed fund on your behalf and instructs them that they are now your sole agent, and are the only ones who can sell your units, and that they are the only ones who can revoke this order. The managed fund notes this on your file. However, not all managed funds are prepared to do this. So if you have units in manged fund B who is not prepared to do this, then your margin lender doesn't want to lose your business, so they get a power of attorney off you, and then use that power of attorney to transfer your units over to themselves. However, when they do so, they open the new unit account as "<margin lender name> as trustee for bill smith". So effectively, the shares are still owned by you, but you can't sell them, because the trustee has control of them. Any distributions the margin lender receive they will send onto you. So out of these two methods, the first one is much simpler, as everything not only stays on your name, but it units stay in the same account. With the second method, they are still in your name, but someone is trustee, they move the units to a new account. Now, after you have finished with your margin loan, the margin lender has no need to be trustee anymore, so they ask you to move the units back into your own name (without the trustee on it). You need to open a new account and do a transfer of the units to do this.

OK, so now the question is, do you have to pay capital gains on the transfer to the trustee account and back? I don't have a ruling from the ATO on this, but from my research, the answer is no you don't. Imagine this: you own a block land in your own name. You are going overseas for a long time, so have the title of the property updated to show someone is acitng as trustee for you. When you come back, you update the title again to take their name off, but leave yours on. You haven't sold anything, you haven't gained anything, so there is not CGT. The property was in your name all along.

The margin lenders don't explain the mechanics of this anywhere, and it took me a long time to work all this out. I think after you explain to your accountant excatly what happens, he/she will be OK with it. In short, you are not transferring the units to someone else, you are transfering the units to yourself, so there is no CGT.

 

Thank you

This is the most clearly written explanation from a very knowledgeable person. I am very grateful. Thank you.