The director of index research at FTSE, Jamie Perrett, said the impact of franking credits and off-market share buybacks had already been incorporated into the FTSA ASFA after-tax benchmark, and the “much trickier” inclusion of capital gains tax (CGT) impacts would occur shortly. The index design committee had decided to go back only five years for the inclusion of CGT data, with Perrett saying that anything further would be “less real” to today’s investors. The industry’s gradual embrace of after-tax performance reporting came at a time where the tax landscape was changing. For instance, the participation of super funds in off-market buybacks would no longer provide a post-tax benefit, thanks to pending legislation restricting funds’ ability to offset the CGT incurred. However Steuart Roe, the chair and managing director of Aurora Funds, said off-market buybacks were still beneficial for pension investors on a zero tax rate, adding to the argument that super funds should begin to invest their accumulation and pension accounts as separate portfolios.

No fund, to Roe’s knowledge, did this today. Roe said the aftertax focus would increase managers’ interest in the ‘cum dividend’ market, which was established in the two days after an ASX-listed company went ex-dividend. Warakirri’s Nolan pointed out the fundamental inequity of what had been happening in local equities. “Managers have been remunerated on a before-tax performance basis,” he said. “As a result, managers may have sought to maximise their before-tax performance without regard for tax implications. Given that members receive after-tax returns, there has been a clear misalignment of interests.” Warakirri was measuring more than 25 Australian equities managers against unique after-tax benchmarks, with reports going to funds such as HESTA, Australian Super and BUSS(Q). HESTA’s Rob Fowler, executive manager of investments and governance, said: “Given the weighting to Australian equities for most super funds, there are clear benefits for our members that can be achieved through our fund managers focussing on delivering after-tax, rather than pre-tax, returns.” He adds that the fund is “observing changed practices at many of our fund managers, and our experience to date has validated our expectations”.