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Super fund tax management deemed inefficient

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By Miranda Brownlee
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2 minute read

Super funds should adopt a centralised approach to tax management since certain taxes cannot be effectively managed by individual managers within multi-manager structures, says Parametric.

In its research paper entitled What Should Managers Manage, the portfolio solutions provider explained that while most large superannuation funds are now required by law to consider tax, many are still struggling to determine how best to do this.

The paper said the cost of investment taxes borne by superannuation members is hardly marginal at around $3.253 billion per year, making investment taxes the “largest explicit costs to members”.

“This is much larger than investment management fees and other costs, which tend to attract far more attention,” said the paper.

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The paper's author, Raewyn Williams, said while super funds are increasingly urging investment managers to move from a pre-tax to an after-tax focus, what is missing is a “good understanding of what types of taxes can be managed effectively by the manager and what taxes need to be managed in a more holistic way”.

The paper identified capital gains tax as one of the taxes requiring a more centralised tax management solution within a multi-manager structure.

“Individual managers all separately attempting to manage capital gains tax in the best interests of the overall super fund can actually cost money and create unnecessary investment risk to the fund,” said Ms Williams.

She argued super funds should therefore consider using a “centralised portfolio management solution” as this enables super funds to retain what works well in a multi-manager structure while fixing what does not.

“The generation of investment insights is left with the managers, each with their individual portfolio sleeve, while the executive is centralised to allow genuine, effective management of the portfolio on an after-tax basis,” she said.

Ms Williams said that on average, a centralised portfolio management approach can increase annual investment returns on Australian equities by 90 basis points and international equities by 110 basis points, net of all costs, with almost no change in the fund’s investment risk profile.

Super fund tax management deemed inefficient

Super funds should adopt a centralised approach to tax management since certain taxes cannot be effectively managed by individual managers within multi-manager structures, says Parametric.

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