In the lead up to the end of financial year, we are starting to see a few media stories providing advice on how to prepare for the end of the "income tax" year. At the same time we continue to see reports about the negative returns on equity markets with the red ink being pulled out of the drawer for the first time in a number of years for managed funds, including superannuation.
My guess is that many investors will be thinking that there will not be any nasty tax issues in their managed fund portfolios due to the negative performance figures being reported on websites and statements. They might actually be hoping for some tax losses from these funds to write off against their other forms of income. Unfortunately, the bottom line returns of managed funds hide the real story.
Many of the major managed fund providers report ongoing performance figures through their websites outlining the capital growth of the fund along with the distributions that have been paid out to unit holders. Unfortunately not all providers provide this breakdown throughout the year and some have yet to provide the data up to the end of the March quarter 2008. The broadest set of data available is up to the end of February 2008. This sample is far from representative but provides anecdotal evidence of what is going on in terms of managed fund returns and distributions.
|
Fund |
Growth |
Distribution |
Total Return |
|
AXA Australian Equity Growth Fund |
-20.10% |
19.80% |
-0.30% |
|
AXA Equity Imputation Fund |
-26.30% |
25.90% |
-0.40% |
|
BT Australian Share Fund |
-11.41% |
12.28% |
0.87% |
|
BT Imputation Fund |
-4.42% |
5.06% |
0.64% |
|
Challenger Australian Share Fund |
-14.66% |
6.88% |
-7.78% |
|
MLC Australian Share Fund |
-14.70% |
11.60% |
-3.10% |
|
MLC Vanguard Australian Shares Index |
-5.20% |
3.30% |
-1.90% |
|
Suncorp Australian Shares Fund |
-21.42% |
15.87% |
-5.55% |
The dividend yield across the ASX200 at the end of February was 4.3%. If we use this as a proxy assume the best case scenario that all of this dividend yield is fully franked and is received by investors on the 30% marginal tax bracket, this part of the distribution quoted above would be received free from tax.
By implication, this means that the remaining part of the distribution is a capital gain that has been realised by these funds. If we again assume the best case scenario that these capital gains are from assets held for greater than 12 months, and thus receive the 50% discount on capital gains, this would leave the following level of distributions to be taxed at an investor's marginal tax rate:
|
Fund |
Distribution after removing franked div |
Taxable distribution |
|
AXA Australian Equity Growth Fund |
15.50% |
7.75% |
|
AXA Equity Imputation Fund |
21.60% |
10.80% |
|
BT Australian Share Fund |
7.98% |
3.99% |
|
BT Imputation Fund |
0.76% |
0.38% |
|
Challenger Australian Share Fund |
2.58% |
1.29% |
|
MLC Australian Share Fund |
7.30% |
3.65% |
|
MLC Vanguard Australian Shares Index |
0.00% |
0.00% |
|
Suncorp Australian Shares Fund |
11.57% |
5.79% |
Only MLC Vanguard Australian Shares Index (an Index fund) would not be passing on any (or very little) taxable distributions to investors. It is interesting to note that this is the only index fund amongst the list.
In all likelihood, the MLC Vanguard Australian Shares Index would be passing on some taxable distributions as well but it would be significantly less compared to the other funds.
If we take this analysis to next level and reduce total returns by the tax on the taxable distributions (assuming a marginal tax rate of 31.5%) it provides the following data
|
Fund |
Total Return before tax |
Taxable dist |
Reduction in return at 31.5% tax rate |
Total Return after tax |
|
AXA Australian Equity Growth Fund |
-0.30% |
7.75% |
2.44% |
-2.74% |
|
AXA Equity Imputation Fund |
-0.40% |
10.80% |
3.40% |
-3.80% |
|
BT Australian Share Fund |
0.87% |
3.99% |
1.26% |
-0.39% |
|
BT Imputation Fund |
0.64% |
0.38% |
0.12% |
0.52% |
|
Challenger Australian Share Fund |
-7.78% |
1.29% |
0.41% |
-8.19% |
|
MLC Australian Share Fund |
-3.10% |
3.65% |
1.15% |
-4.25% |
|
MLC Vanguard Australian Shares Index |
-1.90% |
0.00% |
0.00% |
-1.90% |
|
Suncorp Australian Shares Fund |
-5.55% |
5.79% |
1.82% |
-7.37% |
An already disappointing investment result just became that bit worse. It is really this after tax return that is most important to investors as it provides the return that is actually going into (or in this case out of) their pockets.
The same type of analysis is relevant to the superannuation environment; however the impact is not as great due the maximum 15% tax rate for income produced within a superannuation fund.
At this point some may be saying hang on, what about the capital loss (negative growth) that has been reported by the funds. Unless investors sell their units held in the fund on or before the 30th of June, these losses would not be realised and therefore not be able to be claimed as a write-off for tax purposes.
I openly admit this is a fairly simplistic approach to the data, but definitely provides some anecdotal evidence of the impact of an active approach to investing in terms of tax consequences.
Regards,
Scott Keefer
