Investors who focus mainly on pre-tax returns may gain a misleading impression of their real investment performance.
And, in turn, they may not give enough attention to trying to keep their tax costs – along with their other investment costs – to a minimum.
Investors have a powerful incentive to efficiently manage tax on their super and non-super portfolios given that it can potentially take a significant cut out of their returns.
Super fund researcher SuperRatings publishes a useful table each month comparing the returns of the median large super funds with balanced portfolios in the accumulation and pension phases.
In short, the table illustrates the impact of taxes even within the concessionally-taxed super environment.
For instance, SuperRatings reports (PDF) that the median balanced super fund in the accumulation phase returned an annualised 13.1 per cent over the three years to July yet 14.1 per cent in the pension phase.
The difference in the performance is, of course, due to their different tax treatment. While the earnings of super funds in the accumulation phase are concessionally taxed, super fund assets backing superannuation pensions are tax-exempt. (These super returns are published on an after-tax, after-fee basis.)
Clearly, the tax gap would be markedly larger if top marginal taxpayers were comparing the after-tax performance of identical investments held inside super and in their own names.
Significantly, Vanguard has long published after-tax returns that can be calculated for investors ranging from top personal taxpayers to tax-exempt entities (including pension-paying super funds). The size of the tax gap may surprise you, depending upon the asset class and tax comparisons selected.
One of the key ways that professional advisers can assist their clients is to advise on the efficient tax management of investment portfolios. This advice may include such fundamental issues as making the most of the concessionally-taxed super system – including in regard to taking a transition-to-retirement pension when eligible.
By Robin Bowerman
Principal & Head of Retail, Vanguard Investments Australia
17 September 2015