Propagation is the next ‘big thing’ for custodians looking to optimise tax parcels to reduce funds’ tax liabilities. It’s a process, developed by DST Global Solutions, where in a multiportfolio fund all investment transactions recorded at the portfolio level (that is, the actual transactions of a fund manager) are also recorded at the fund level. The benefit is that all tax and accounting can be done at the fund level as opposed to what has traditionally been done at the portfolio level. This means the fund can use the most efficient tax parcel allocation, maximising the capital gains tax discount (called ‘tax free gains’) on domestic shares and maximising any tax deferral opportunities (dubbed the ‘time value of money’).

The fund level equals the legal tax paying entity, so the propagation functionality allows funds to access this efficiency. National Custodian Services (NCS) is one of the proponents of this service in Australia, says Ray Lester, general manager – delivery services. The installation of the functionality, he says, includes fund accounting and therefore ensures a consistent approach to both tax and accounting, ensuring that a full tax reconciliation can be properly done between accounting income and taxable income. The debate about after-tax returns in the superannuation and investment industries has included after-tax benchmarks, Lester says, which expressed “a real focus on a lack of measurability”.

“This prompted us to consider how we could come up with a product to contribute real measurable benefits to funds and their members which represented hard, cold cash that was saved and remained within the funds and represented returns to members,” he says. “As more funds move to our tax parcel optimisation product, they’ll be creating a result that can differentiate them from the competition through higher returns to their clients.” The results speak for themselves: some large funds are estimated to save from $20 million to$50 million in the first year of operation, Lester says.

NAB currently is the largest user of DST’s HiPortfolio in Australia, and DST had – through this product – already developed a significant part of the functionality required. It therefore made sense to NAB to leverage its partnership with DST to test and complete the functionality gaps, and then implement a fully integrated and straight-through process to offer tax parcel optimisation. Work on the product began in Melbourne in January 2007 and went live two years later in early 2009. “It’s a very complex piece of functionality which required considerable testing,” Lester says.

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