Australasian shares more tax efficient than cash
How much default KiwiSaver investors’ pay in tax and the surprising disparity between the tax treatment of different assets has been revealed by Morningstar.
Wednesday, September 19th 2012, 6:30AM 8 Comments
by Benn Bathgate
The KiwiSaver After-Tax Performance Survey revealed the Tax Cost Ratio –the amount of tax KiwiSaver funds pay on their assets – for all the default funds bar Mercer, which failed to submit its data by the Morningstar deadline.
The survey revealed default funds managed by AMP, ASB, AXA, OnePath and Tower paid between 1.30% and 1.92% of their assets in taxes.
Morningstar co-head of research, Chris Douglas, said that while tax is a determining factor in fund returns, “investors and advisers should be wary about selecting investments on the basis of the likelihood of the amount of tax which will need to be paid.”
The survey also revealed the differing tax treatment of various asset classes, and how efficient Australasian equities are compared to other asset classes.
For instance cash had a tax cost ratio of 0.8% and 0.82% for one and three year periods compared to Australasian equities which came in at 0.50% and 0.22% in those periods.
Morninstar says a Tax Cost Ratio of zero indicates that a fund is very tax-efficient, while a 5% Tax Cost Ratio indicates a less tax-efficient offering. For example, if a fund had a 2% Tax Cost Ratio for the three-year time period, it means that on average each year, tax cost an investor 2% of their return.
Douglas said that an absence of capital gains tax on New Zealand and Australian shares meant they were even more tax efficient than cash.
“In fact, when imputation credits are taken into account, we have heard of some KiwiSaver funds providing investors with tax refunds,” he said.
International assets are taxed differently. Any geographical tilts in the investments owned by KiwiSaver funds will therefore have a meaningful impact on the tax paid."
The survey also revealed the vast majority of total KiwiSaver funds under management, 40.2%, is invested in cash and New Zealand bonds.
International shares and international bonds were the only other two categories to have double-digit amounts of KiwiSaver cash invested at 20.3% and 19% respectively.
Despite its tax efficiency, New Zealand and Australian shares account for just 9.5% and 4.6% respectively of KiwiSaver cash.
“A lot of them [KiwiSaver fund managers] are looking to diversify across global equities as well as New Zealand and Australia,” said Douglas.
“But we’re a very small part of the world and a very concentrated market with some very sector-specific concentrations.”
Benn Bathgate is a business reporter for ASSET and Good Returns, email story ideas to email@example.com
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