The first series of benchmarks cover all shares in the Australian market and record the beneficial impacts of franking credits attached to dividends, and the effects of franking credits and capital gains tax (CGT) resulting from off-market buy-backs, because these changes could be traced more easily in an industry-wide benchmark than other tax events, such as CGT across whole portfolios. “The focus is on franking credits. CGT is something we’re continuing to work on. We’re not providing it on the first go; it will be in the second phase,” Hoff said.
The benchmarks provide a good starting point for super funds, said Raewyn Williams, tax strategist with Queensland Investment Corporation (QIC), because previous efforts to develop after-tax benchmarks had aimed for all-encompassing solutions that fell short of a finished product. “After-tax investing is very conceptual at the moment. It’s a discussion of principles.” But concrete results from funds being managed to the basic indices produced by FTSE and ASFA should generate momentum for more practical improvements.
“One way the dialogue will evolve is to put quantitative numbers to this,” Williams said. For now, FTSE, ASFA and an after-tax investment committee chaired by Rosemary Vilgan, executive of QSuper, and featuring other industry participants, such as QIC’s Williams, will focus on running the indexes before modifying them, Hoff said. “The initial stage is bedding this down. Another thing the market will require will be sector indexes, and we’ll be looking at CGT,” he said. QIC manages about $20 billion across different asset classes on an after-tax basis. Williams said prudent management of tax liabilities could add between 15 and 30 basis points to returns in a weak market, but this would be “significantly exceeded in up markets”. She said investors should be wary of “after-tax-lite” arguments made by managers. For example, passive managers claiming tax-aware investing is an exercise in controlling turnover to minimise CGT omits considerations such as franking dividends and the tax effects of off-market share buy-backs.