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Industry Funds Management (IFM) has built an internal system
to automatically evaluate the tax implications of its investment decisions – before
trades are executed – across its active and passive Australian equities funds. Dubbed
ATLAS, the after-tax listed Australian securities system draws on a database of
trading data already stored by IFM to identify the impacts that trades will
have on the franking credits and capital gains tax (CGT) liabilities tied to
shareholdings. “We can analyse, pre-trade, the full after-tax consequences of a
transaction,” Aidan Puddy, executive director – listed equities at IFM, said.

example, if the manager was considering selling-down a shareholding in one of
its portfolios, ATLAS would identify whether this transaction would destroy the
franking credits attached to the shares by violating the 45 day rule, or incur
a capital gains tax liability of 15 per cent because the stock had been held
for a super client for less than 365 days, rather than the 10 per cent rate attached
to shares owned for more than a year. But in delaying share sales to realise
these tax benefits, the manager is exposed to pricing risk as the market keeps
trading the securities concerned. “It becomes an investment decision, where we
look at how many franking credits will be destroyed versus the expected future
price of the stock,” Puddy said.

“We can ask: can we take the pricing risk for
two days and get the franking credits, or not take the risk and destroy them?” IFM
runs a suite of index funds covering the Australian market and a high
conviction product that views the success of companies’ reinvestment in their
operations and people as the determining valuation factor. The manager will
soon receive a $3 billion mandate from one of its clients, the $28 billion
AustralianSuper, to manage passively.

The mandate will account for roughly half
of the fund’s Australian equities portfolio and follows the termination of
about 20 mandates with active domestic equities managers, a move aimed at
reducing duplication of trading positions in the portfolio. The mandate will
take IFM’s listed equities business to about $4.7 billion in funds under
management, most of which is held in its indexing business. In addition to ATLAS,
the manager also offers customised after-tax benchmarking and full reporting at
a slightly higher cost.

The benchmarks, which go live at the same time as
client mandates, allow for a comparison of IFM’s investment performance on an
after-tax basis. “Because each portfolio has a different start date and cash
flows, there can’t be one after-tax benchmark for everybody. You need one for
each portfolio.” The recent spate of capital raisings by listed Australian
companies had created many tax events for index managers, Puddy said.

It was
likely that managers had destroyed franking credits as they were forced to
sell-down shareholdings to buy into equity raisings to reflect changes in the
index. Puddy said that ATLAS identified opportunities during this period to delay
the raising of cash needed to participate in the equity raisings in order to preserve
franking credits, or qualify for a discounted CGT rate. “We had one stock that
we would have needed to sell to fund a rights issue, but we saw that if we held
onto the shares for a couple of days we wouldn’t violate the 45 day rule.” ATLAS
was developed internally by IFM’s listed equities, operations and commercial


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