Great-Australian-Tax-Bite-East-Away-Investors-Savings-2007_08_15.pdf (PDF - 68KB)
Melbourne, 15 August 2007 - The latest analysis of fund management returns by Vanguard Investments has revealed the full impact of tax management issues on investors' real returns for the last financial year.
Based on Morningstar return data Vanguard compared the after tax return for a top marginal taxpayer with the average return achieved by Australia's 15 largest Australian share funds.
Using Vanguard's low turnover Australian Shares Index Fund as the benchmark an individual who invested $500,000 on 1 July 2006 at the start of the financial year could be $38,000 worse off by 30 June 2007 simply because of the amount of tax that has to be paid on the fund's distributions.
While the top 15 Australian equity funds delivered a great headline return for investors of 26.8% that result was soured for top marginal taxpayers because 76% of the return was paid out to investors as income distributions and was therefore taxable.
From the 26.8% total return 21.4% was delivered as taxable income by Australia's largest share funds.
Compare that with a total return of 28.8%* delivered by Vanguard's Australian Shares Index Fund for the last financial year. Not only did the index fund outperform its major fund competitors in a total return sense the distribution amount was 6.2%. On a pre-liquidation** basis Vanguard's Australian share fund delivered an after tax return of 22.4%.
Jeremy Duffield, Managing Director of Vanguard said, "Many investors will have received their annual tax statements recently and got a rude shock when they realised what the tax impact of their fund distributions were.
"This is an issue of transparency and investors should be able to get solid information before choosing to buy an investment fund."
Fund managers who did not consider tax management issues could have cost investors more than 9% in after tax return according to the analysis by Vanguard that looks at three model portfolios with low, medium and high tax efficiency.
Vanguard has led the Australian industry since it began reporting after-tax returns in October 2004 and has welcomed the moves by other leading fund managers and research group Morningstar to provide investors and advisers with the after tax information to help them make better-informed investment decisions.
"Tax is the biggest cost any investor - even inside a super fund - will typically have to pay so it makes a lot of sense for investors to be able to see how their money is being managed from a tax-efficiency perspective," Vanguard's Head of Retail, Robin Bowerman, says.
Super funds enjoy concessional tax rates but even within a self-managed super fund the difference between efficient tax management of a fund portfolio and an inefficient approach is slightly more than 4% for the last financial year.
Assumptions:
- Investor is a resident tax payer
- Income is subject to tax at the investor's marginal tax rate plus Medicare levy (where applicable)
- Income earned is taken as cash distributions and reinvested after tax on 30 June
- CGT discount at appropriate rate is available (50% individuals, 33.3% SMSFs)
- 15% MTR assumes SMSF investor, 1/3 CGT discount
- Franking credits are excluded from the calculation
- Dividend yield (incl. tax deferred) in average fund is equal to Vanguard (ie. Assumes dividends received in line with Index, difference in income return is capital gains)
- Low efficiency manager has 100% short-term gains
- Medium efficiency manager has 50% short-term gains
- High efficiency manager has 100% long-term gains
Vanguard Investments Australia
Vanguard Investments Australia Ltd is a wholly owned subsidiary of The Vanguard Group which is based in the US and currently manages over US$1.2 trillion (A$1.4 trillion) for more than 22 million individual and institutional accounts as at 30 June 2007.
In Australia, Vanguard has established a reputation as a specialist indexer, managing more than A$65 billion in index funds, for both institutional and retail investors.
