What Are Pooled Funds?
Most Australian Retail/Industry Superannuation Funds are pooled funds. Pooled funds are investment vehicles that aggregate money from multiple individual investors to create a larger, professionally managed portfolio
Key features of pooled funds:
Investors own units or shares in the pooled fund, not the underlying assets directly.
The fund is managed by superannuation funds who make investment decisions on behalf of all investors.
Returns, such as income and capital gains, are distributed to investors based on their proportionate ownership
Tax Disadvantages of Pooled Funds
While pooled funds offer diversification and professional management, they also come with tax-related drawbacks that can impact long-term returns, especially when compared to direct ownership of assets.
- Tax Paid at the Fund Level
In most pooled funds tax is calculated and paid at the fund level, not the individual level. This means:
The fund must pay tax on capital gains and income as they are realised, regardless of whether you, as an investor, have sold your units or not.
Tax liabilities are shared among all investors, even those who did not trigger the sale of assets that led to a taxable event
- Loss of Tax Deferral
With direct ownership (for example, holding shares or ETFs in an SMSF), you can often defer paying capital gains tax until you actually sell the investment. This allows your money to compound tax-free for longer, potentially resulting in a much larger after-tax balance, especially if you move into pension phase in retirement
In pooled funds, however:
Capital gains are realised and taxed as the fund manager buys and sells assets within the portfolio—even if you haven't sold your units.
This ongoing realisation of gains means you lose the ability to defer tax, which can erode your compounding returns over time
- Tax Impact of Other Investors’ Actions
Because pooled funds are unitised, if other investors withdraw their units, by moving to pension phase or moving to another super fund, the fund may need to sell assets to meet those withdrawals. The resulting capital gains are then distributed as a tax liability across all remaining investors, not just those who triggered the sales
This can lead to situations where you pay tax on gains you did not personally realise.
- Superannuation and Retirement Phase Issues
In superannuation, pooled funds continue to pay tax on capital gains as they occur. When you retire and move your super into a tax-free pension phase, you ideally want to carry forward as much unrealised capital gain as possible, so it can be realised tax-free. With pooled funds, much of the tax is already paid before you reach this phase, reducing the potential benefit of the tax-free environment in retirement
- Ongoing Drag on Returns
The combination of frequent tax events and the inability to control the timing of those events creates a persistent drag on your investment returns, especially over long periods
Conclusion
Pooled funds offer significant benefits in terms of diversification and access to professional management, but investors should be aware of the tax disadvantages. The main issues are the loss of control over when tax is paid, the possibility of paying tax on gains triggered by others, and the erosion of long-term returns due to ongoing tax liabilities. For investors with larger balances or those focused on tax efficiency, direct investment options may offer better after-tax outcomes
Disclaimer
This material has been prepared for information purposes ONLY, and is not intended to provide, and should not be relied on without Tax/Accounting/Legal/Financial/Credit advice from a relevant qualified adviser.