Withholding Tax on Separately Managed Accounts – An Overlooked Opportunity?

Introduction to SMAs

Separately Managed Accounts (SMAs) are portfolios of individual assets managed by a professional money manager on behalf of an investor. Instead of investing in traditional mutual funds or Exchange Traded Funds (ETFs), where securities are pooled or track an index, SMAs allow investors to own the assets directly. SMAs have traditionally been reserved for high net worth individuals or institutional investors as the account minimums usually range between $100k-$250k or higher. Not only does this allow investors to take advantage of their personal tax situations but it adds a degree of flexibility to the investments they hold.

Instead of following a model portfolio based on a specific investment strategy, the investor can customise their portfolio to exclude or include specific stocks or bonds depending on their personal circumstances or ethical views. Some investors may choose to remove certain stock positions due to holding a position elsewhere (e.g. via pension investments or stock options) or exclude tobacco, alcohol and gambling stocks due to ethical or religious reasons.

SMAs have allowed investors to achieve greater tax efficiency via tax loss harvesting. Tax loss harvesting occurs when an investor sells a stock which has incurred a capital loss in order to offset a capital gain liability incurred elsewhere. This type of tax loss harvesting is not available when investing in mutual funds as the buying and selling decision lies with the fund manager. Any capital gains and losses are passed on to all investors as and when securities are sold by the fund, without consideration of each investors’ tax impacts.

For withholding tax recovery purposes, filing claims on behalf of SMAs creates added complexity as there is often confusion around who should be taking care of these recoveries. Unclaimed withholding taxes pose a great opportunity for additional income to SMAs.

Additional Income Opportunity for SMAs

Due to the administrative burden and low value, high volume nature of filing reclaims, the filing of withholding tax reclaims is often overlooked. We have found that the responsibility of filing claims, has often not been clearly defined and assigned to one of the many parties involved in the investment world. This leaves material amounts of recoverable withholding tax on the table, which ultimately expires if it goes unclaimed. Due to a lack of transparency, we regularly find that claims have been left to expire. All that is required is further investigation, to establish whether all reclaim opportunities have indeed been identified and refund applications submitted.

The Complexity of Filing Withholding Tax Claims

As the account holder is the beneficial owner of the underlying securities (as opposed to a mutual fund or ETF), the document collection process is especially administrative as, amongst other documents, each account holder’s tax residency certificates, ID and/or Passport need to be obtained and submitted with the necessary forms, in line with the respective foreign tax office requirements.

How WTax Improves Your SMA’s Performance

WTax alleviates the administrative burden of withholding tax reclaims, by offering a fully outsourced solution, to SMA account holders directly as well as partnering with money managers of SMAs. To begin, WTax analyses all withholding taxes suffered and recoveries already achieved and determines which reclaim opportunities remain. WTax then takes care of the entire recovery process from claim initiation to refund receipt from the foreign tax authorities. Through this process, asset owners are assured that the withholding tax of all SMAs, even where these are placed with various assets managers, is taken care of.

As fees are fully success-fee based, the result is minimised tax leakage which leads to improved investment performance.

Please get in touch with WTax’s regional specialists to find out more about how we can improve your investment performance. To find out more about withholding tax and the reclaim methodologies available please click here.

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