Tower Managed Funds has launched its first tax-effective Australian domiciled managed fund and is promising more will follow.
The first fund in its Advantage series is a hedge fund that uses Deutsche Bank's Offshore Value Fund as its underlying investment.
Key features of the fund are that it will have a tax advantage over New Zealand funds, the fund price is only struck once a month, and investors can only get or out of the fund on one day each month.
The fund will make 90% of its distributions by issuing bonus units to investors and these units are free from tax. The remaining 10% will be in cash that will be taxable.
Tower does not have a ruling from the Inland Revenue Department for the fund.
General manager risk and investment products Richard Baker says the fund has been signed off by a number of experts including PricewaterhouseCoopers.
He says it is "questionable whether (binding rulings) add any value."
Baker says the fund is aimed at complimenting its current hedge fund offering the Tower GAM Multi-Trading fund.
He says the Deutsche fund has lower risk than the GAM one, it has more managers, plus it hedges the currency.
Baker says Tower plan to migrate the Multi-Trading fund to an Australian domicile later this year.
One of the big questions which comes up is how long will these offshore funds keep their tax-advantaged status, now the Government is considering introducing a Risk-Free Rate of Return method for taxing offshore funds?
Baker says if the Government goes ahead with the changes the window of opportunity will stay open for two or three years as it will take that long to make the changes.
He argues that an RFRM impost on offshore funds may work in the funds' favour because they are likely to be paying less tax than a New Zealand based one.
Under the RFRM model investors would only be taxed on the return which is equivalent to the risk-free rate (which seems to be around 4%). However, if a New Zealand fund made 10% investors would be taxed on that return.
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