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.
- Tax-aware investing builds tax into the investment process to help reach ‘tax alpha’
- Technology and data are key to accurate calculations being delivered fast
- GBST tax solutions provide Australian clients with best-in-class investment tax intelligence and analysis capability
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.
Chasing ‘tax alpha’
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.
The role of technology
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.
Further opportunities for 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:
- Responding to legislation changes – dealing with legislation changes at scale can be complex so ensure your tax system provider supports with automated solutions. We’ve helped a major Australian superannuation fund client deliver tax benefits to their members following a change to the capital gains tax regime last year.
- Managing transitions effectively – tax leakage can occur during transition, such as a change in fund manager or strategic asset allocation. Our recent work with a large fund helped them apply pre-trade tax logic to transitions to improve tax alpha.
- Taking it global – with Australian funds investing more in global equities, it’s important to benchmark against international indices. One of our major investment manager clients recently went live with the first MSCI world index based after-tax benchmark in Australia.
- Integrating global systems – many global providers entering the Australian market are unfamiliar with the complexities of our capital gains and franking credit regimes, so ensure your system provider is working with local experts. We recently launched a strategic alliance with a major global investment system provider allowing their clients access to GBST’s tax engine for Australian tax calculations.
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.
Taking on tax in 2019
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.
Posted in: Tax and quantitative, Wealth Management Administration
