Posted in: tax and quantitative, Wealth Management Administration
Elly Grace, GBST Client Relationship Manager and Tax SME, looks at the evolution of tax management in the superannuation and funds management space and how it can be used to boost performance.
The Australian tax, investment and superannuation landscape of today looks very different to 2009, when the Association of Superannuation Funds of Australia (ASFA) FTSE After-tax benchmarks were first introduced. The grossed-up franking credit series was designed to assist funds with after-tax performance measurement, moving on from pre-tax performance measurement which had been the norm.
In the decade since these changes, the investment tax discipline has moved from an ‘after the event’ compliance obligation into the middle and front office as a variable that can be both managed and measured. Tax data is now recognised as valuable to the investment process and vital to improving after-tax returns, through the generation of ‘tax alpha’.
More than simply optimising tax compliance outcomes, tax alpha is the outperformance an investor can achieve through an awareness of the practical operation of the Australian tax legislation on a pre-trade basis, particularly relating to equity investments. The bigger the size of the equity book, the greater the opportunity for tax optimisation.
The potential value to funds of optimising tax is significant. Figures quoted in the Productivity Commission report into Superannuation (released in January 2019) suggest the cost of lost tax efficiency ranges from around 0.5% up to some 2.0%. With findings that a mere 0.2% improvement in returns over a working life can improve a member’s balance at retirement by 5.4% ($45,000), opportunities to obtain tax alpha should not be overlooked.
Tax and investment expertise alone won’t get you to tax alpha – you need the right technology, systems and data.
The Productivity Commission report acknowledges after-tax management as a complex discipline. The volume of transactions and the time-sensitive nature of the analysis required demands tools primed for detailed tax calculation methodologies.
The report mentions GBST tax solutions as exactly that – a technology solution that facilitates tax aware investment management. Known as Tax Analyser, GBST’s pre-trade tax calculation engine enables an equities portfolio construction team to understand the Australian tax consequences of their planned investment decisions (including the 45-day holding period rule and potential short-term capital gains tax consequences).
Pre-trade tax analysis calculation and reporting is now widely used for Australian equities tax investment management and is crucial for achieving tax alpha.
Once tax data has been embraced as part of the investment decision process, funds should look at other ways to increase tax alpha. Recommended areas for focus in 2019 include:
In a maturing industry, tax analysis and management as part of the investment process give us the ability to deliver improved returns to members. The evolution of tax intelligence and analysis reflects an industry-wide willingness for collaboration and change. As a multi-disciplinary space, best practice will be brought to life by an entire industry committed to delivering improved after fee and tax returns to members.
Talk to our team about our suite of tax solutions to make the most of every opportunity in 2019 to achieve improved after-tax returns for your investors and members.