Fund returns under FDR improve

Aon Consulting has done some work on showing how the proposed Fair Dividend Rate (FDR) on investments will work in terms of performance numbers.

Wednesday, November 22nd 2006, 6:54AM

The bill is currently before the Finance and Expenditure Select Committee and a finalised report is due at the end of this month.

While it is considering FDR as an option, Good Returns understands the committee maybe leaning towards the deemed rate of return method earlier proposed by former BT Funds chief executive Craig Stobo.

However, since FDR is on the table it is useful to see how it works in practice.

FDR, under the proposal, will tax offshore shares as 5% of the market value of the shares. There will be no tax explicitly on dividends.

For managed funds, including superannuation schemes, taxable income will be 5% of the average value of the overseas shares over the year. This is irrespective of the actual gross return on the assets over the year, and almost certainly will mean tax payable in years of capital losses, as illustrated below:

Investment return (tax rate of 33%)
Before tax	-10%	0.0%	10%	20%
After tax	-11.6%	-1.16%	8.3%	18.2%

While the outcome in the first two examples is not good, ie: paying tax on losses wor when there are no gains, there is good news for investors in pooled investments that are actively managed.

Aon have estimated the effective impact on after tax returns, as shown in the table below. These are based on actual gross investment returns for each of the past five years ending September 30 for a balanced investment portfolio (40% income assets, 60% growth assets).

This period includes years of strong capital returns, but also a year of negative returns.

Comparison of tax systems
Year to 30/9/	Gross return %	After tax returns
	% pa	Current % pa	Proposed 33%	Proposed 19.5%
2006	15.5	10.3	12.8	13.8
2005	15.2	10.1	12.5	13.6
2004	8.6	5.7	6.3	7.2
2003	7.0	4.7	4.7	5.6
2002	-3.5	-2.3	-5.7	-4.8
5 yrs % pa	8.3	5.6	5.9	6.9