Fees debate masks hefty tax bills
New research from Morningstar shows that 70 per cent of Australia’s top 10 performing wholesale funds delivered double digit income returns in the 12 months to June 2005, resulting in increased tax bills for investors.
Head of consulting Anthony Serhan said “both retail and wholesale funds delivered about half of their total return as distributions or income . . . it is reasonable to assume that a hefty portion of that income has been generated by realised capital gains because the income component of the S&P/ASX Accumulation index was 5.2 per cent”.
He added that investors “may be very happy with the return figures, but unhappy with the tax bill”.
Speaking at the Financial Planning Association’s 2005 National Conference, Serhan said: “We all know capital gains are good — it is part and parcel of what you’re doing with your client’s money. But how soon do you want to pay tax on it?”
According to Serhan, both advisers and their clients have an increased awareness of the impact tax can have on returns, saying that research houses such as Morningstar also face difficulties in gathering data from funds managers.
Serhan added that the research showed that funds which claimed to be tax effective didn’t necessarily deliver better returns than those that didn’t make that claim. “But the marketing is changing — some funds are now withdrawing the word ‘imputation’ from their fund name.”
Vanguard Investments head of retail Robin Bowerman, also speaking at the conference, said: “We have an industry which manages funds as if they were tax exempt — it is a forgotten cost.”
He added that the focus on after tax return was likely to become greater as baby boomers entered retirement and concentrated more on the income generated by their investments. “There has been a big focus on fees as a result of the industry funds’ campaign, but tax takes an even bigger bit,” he said.
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