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Separately Managed Accounts Explained

At the beginning of your investment journey, you might start investing with a combination of exchange-traded funds (ETFs), mutual funds, and other investments when you develop your investment portfolio. But if your funds expand, you might want a strategy more tailored to your personal investment needs. With a separately managed account (SMA), you have more control over your assets and a more personalised portfolio. However, the question is, can separately managed accounts benefit from tax reclaims? Let’s take a deeper look.

What Are Separately Managed Accounts (SMAs)?

A separately managed account is a personalised investment portfolio overseen by a qualified investment manager on behalf of the investor. Similar to mutual funds or exchange-traded funds, these investment vehicles consist of multiple securities. Some of these include stocks, bonds, and other assets. However, when they invest in an SMA, the investor owns the stocks in the portfolio. The fund manager builds a portfolio of investments while considering the investor’s financial objectives.
Investors can tailor their portfolio to exclude or include specific stocks or bonds depending on their circumstances or ethical beliefs rather than adhering to a model portfolio based on a particular investment approach. Some investors may exclude particular stock positions to make room for other holdings. An example is pension investments or stock options. Additionally, they might avoid stocks related to alcohol, tobacco, and gambling for moral or religious reasons.
SMAs generally have minimum investments that range from $100,000 to $1 million. It depends on the firm and the complexity of the strategy. As a result, separately managed accounts are more appropriate for high-net-worth or institutional investors. These types of investors want total control over their portfolios. Alternatively, they want to invest in strategies that aren’t available through mutual funds or exchange-traded funds.

A benefit of Separately Managed Accounts

One of the benefits of investing in an SMA is tax loss harvesting. Through tax loss harvesting, SMAs have allowed investors to reduce their tax burden. Tax loss harvesting is when an investor sells a stock that has suffered a capital loss to mitigate a capital gain liability obtained elsewhere. Whereas, when one invests in a mutual fund, tax loss harvesting is not possible. The fund manager makes all the purchasing and selling decisions. Without considering the tax implications for each participant, any capital gains or losses are distributed to all investors as the fund sells securities.

Taxation of Separately Managed Accounts

The taxation of SMAs is complex and varies by jurisdiction. Income from dividends, interest, short-term capital gains, foreign securities and other sources may be taxed differently in your jurisdiction compared to income from long-term capital gains, carried interest and stock options.
For example, you can exclude 50% of any dividend received from an SMA treated as a portfolio dividend under US tax law if that dividend comes from a U.S.-source portfolio fund or an equity real estate fund (ERF). Portfolio dividends include the most common shares issued by mutual funds or exchange-traded funds (ETFs). However, certain international stocks don’t qualify as portfolio dividends because they are subject to a 30% withholding tax requirement. It could cause some investors to receive less than expected during their taxable year. It is dependent on when they sell those assets within their account.

Additional Income Through Withholding Tax Reclaims

Filing claims on behalf of SMAs to recover withholding tax adds another layer of complication. It is frequently unclear who should be responsible for claiming these recoveries. Unclaimed withholding taxes offer SMAs a fantastic chance to earn extra income.

Withholding tax reclaims can be disregarded due to the administrative effort and low value, high volume nature of submitting reclaims. We have observed that the obligation to file claims is seldomly clearly defined and delegated among the parties involved. It leaves substantial sums of recoverable withholding tax on the table, which, if left unclaimed, can expire. We frequently discover that claims have been allowed to expire because there is a lack of transparency.

Filing Withholding Tax Reclaims Can Be Difficult

The document collection process is particularly admin-intensive. Each account holder’s tax residency certificates, ID, or passport need to be obtained and submitted with the necessary forms, following the requirements of the respective foreign tax offices. It is because the beneficial owner is the account holder of the underlying securities.

How Global Tax Recovery Will Enhance the Performance of Your SMA

Global Tax Recovery reduces the administrative burden of withholding tax reclaims by working with money managers of SMAs. GTR provides a fully outsourced solution to SMA account holders directly. Global Tax Recovery will first identify which reclaim chances exist. Global Tax Recovery handles the entire recovery process, from the start of the claim through the receiving of the refund from the foreign tax authorities. Asset owners are given the assurance that the withholding tax of all SMAs, even when they are deposited with different asset managers, is taken care of through this approach.


We hope that this article has given you a better understanding of SMAs and the tax implications of investing in them. If you are looking to get the most out of your separately managed account, visit www.globaltaxrecovery.com for more information.

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