The Tax-Smart Investor: Using ETFs to Optimise your Tax-Adjusted Returns

It’s easy to forget that sometimes small decisions can change our financial outcomes. Little investments today can compound to bigger ones tomorrow, and likewise, the investments we buy or sell today can make a difference at tax time too.

There are a range of ways to be more efficient in how your tax is managed, and often investors assume their only choice is to use direct shares via which they have complete control. But, it’s still possible to be tax-aware in your portfolio while using managed investments like ETFs. Better yet, the same principles still apply.

What to Consider when it comes to Investing and Tax

There are always tax implications for investing, but being conscious of the rules can help you manage tax more effectively.

Three important things to remember follow:

1. Capital gains or losses

When you sell an investment, the difference between your purchase price and your sales price has tax implications.

Generally, you invest with the hope of a gain and you will pay your marginal tax rate on this gain. If you’ve held the investment for more than 12 months and are an Australian resident for tax purposes, you might qualify for the CGT discount of 50%.

This means you would only pay your marginal tax rate on half of the capital gain.

In the event you’ve had to sell at a loss – and there are a range of reasons you might do this, such as needing to free up cash or cutting your losses on an investment that no longer meets your rationale for investing, you could use the capital loss in your tax return to offset gains in another part of your portfolio.

2. Income from yield/coupons, dividends, distributions

Any payments you receive from your investments that isn’t a result of capital gains or losses, such as dividends, is subject to your marginal tax rate.

3. Franking credits

Some distributions or dividends may be ‘franked’ and have franking credits attached. What this means is that the company has already paid Australian tax on their earnings and the dividend has been paid from their after-tax earnings. It then has a tax credit attached and you only need to pay tax on the dividend to the extent that your marginal tax rate exceeds the rate of tax the company has paid on the dividend income. You may be entitled to a refund of the tax paid if your marginal rate is less than the rate of tax paid by the company. Retirees commonly use franking credits to support their income needs.

These are some of the basics, but as tax is often a complicated beast, there may be other rules to be aware of depending on the way you’ve invested. For example, if you had taken out a loan to invest in shares or other income-producing investments, there might be the option to claim deductions on the interest repayments under specific circumstances.

Applying the Rules to ETF Investing

While it may seem it is easier to apply these rules to direct shares, that doesn’t mean you can’t be tax-efficient using ETFs. The application can look a bit different though.

If you start by looking at capital gains or losses, the more frequently a fund buys and sells (aka the higher its turnover), the more frequently it will crystallise a gain or a loss on your behalf.

This means that, ideally, you want an ETF with low turnover because there’s less crystallisation and you are more likely to benefit from the CGT discount. Passive ETFs often have lower turnover because the indices they track don’t tend to change wildly.

Some examples of this include:

• Global X Australian 300 ETF (ASX: A300) which tracks the FTSE Australia 300 Index and has some franking applicable from underlying company earnings.

• Betashares Nasdaq 100 ETF (ASX: NDQ) which tracks the NASDAQ 100 Index (but note that differing tax applies to any earnings from foreign companies).

You also have the option to consider ETFs with more static underlying assets, like gold where there is no income and you’ll only experience a capital gain or loss when you choose to sell units in the ETF. An example is Global X Physical Gold (ASX: GOLD) which tracks the gold price by investing in and storing physical gold bullion.

When it comes to income, ETFs focused on income from Australian companies may offer a better likelihood of also offering franking credits – it’s not a guarantee because not all Australian companies pay franked dividends. Some of these ETFs may be considered smart-beta rather than strictly passive investments because they use additional filters for desirable criteria like higher dividends.

Some examples are:

• Global X S&P/ASX 200 High Dividend ETF (ASX: ZYAU) which invests in 50 high-dividend stocks from the S&P/ASX 200 Index. The 12-month franking level at 31 October 2025 was 83.53%.

• Betashares Australian Dividend Harvester Fund (managed fund) (ASX: HVST) which invests in companies identified for high dividend and franking outcomes from the largest 100 Australian companies. The franking level was 67.5% as at 30 September 2025.

Some actively managed funds may also fall in this category for targeting franked dividends too.

An example of this is the Plato Income Maximiser Ltd (ASX: PL8) – a listed investment company (LIC) rather than an ETF, but traded on the ASX similarly – which tracks the strategy used by the Plato Australian Shares Income Fund, specifically designed to benefit zero-tax investors who can utilise franking credits.

Tax-conscious and Passive in One

Using passive, buy and hold style investments that don’t require daily monitoring on your part can still be a tax-conscious choice, if you take the time to research the options that will be best suited to your portfolio.

Consider portfolio turnover, whether the ETF contains international assets or domestic, along with the prospect of franking credits as part of your search. Finally, remember that in this case, buy and hold could be in your best interest – the CGT discount applies if you hold your ETF units for longer than 12 months.

Disclaimer: This article is prepared by Sara Allen. It is for educational purposes only. While all reasonable care has been taken by the author in the preparation of this information, the author and InvestmentMarkets (Aust) Pty. Ltd. as publisher take no responsibility for any actions taken based on information contained herein or for any errors or omissions within it. Interested parties should seek independent professional advice prior to acting on any information presented. Please note past performance is not a reliable indicator of future performance.