Philip Beresford, Project Manager, Investments
Super funds operate in two different tax environments. During the accumulation phase and right up to retirement investment earnings are taxed at between 10 per cent and 15 per cent whereas the income (or pension) phase has zero tax applied. So how does all this affect investment decisions? To illustrate let’s take a look at a simple example.
A share is purchased for a member for $10 when they are 50, by the time they are 56 it is worth $50. If the share is sold there could be two different outcomes. If it is sold while the member is in an accumulation product the gross profit is $40 and $4 is payable in tax leaving $46. Alternatively if the share is sold in an income product there is no tax payable and the member ends up with $50. The difference in tax treatment has an impact equivalent to a 2% return a year in annualised terms.
Let’s now look at a more complex example whereby we have an existing property worth $100 million currently giving us an 8% return of $8 million per annum. An alternative property comes up for sale at a cost of $95 million offering a 9% p.a. return ($8.5million). Should we sell the old property to purchase the new one? An important piece of information is how much the original property cost, so let’s assume $50 million.
If we keep the original property in the next year we will have $8million in income. In this example the net result to the fund is an increase in value to $108million.
Now let’s look at what happens if we sell the property to buy the new one assuming the property is held in an accumulation fund. We will sell the property for $100million realising a capital gain of $50million and incurring capital gains tax (CGT) of $5million. We buy the new property for $95million dollars and receive $8.5million in income. The net result to the value of the fund is an increase to $103.5million. It will take at least 10 years for the new property to catch up to the old proprty in total benefit to the fund.
Alternatively if we look at the decision from the viewpoint of the asset in an income fund in which case no CGT would be payable. Therefore in the first year the value to the fund of the new property would be $108.5million.
Now of course tax is only one of a range of considerations that are taken into account when making investment decisions but clearly the decision to sell or retain has dramatically different consequences based on where the assets are held.
Unlike many funds QSuper has its assets segregated into different pools for Accumulation and Income funds and so can make very clear decisions based on known consequences. It also allows the QSuper Fund to transition assets between accumulation and income funds as members move through their life stages so assets originally purchased in an accumulation phase may be sold many years later from the Income fund with no CGT being payable.
QSuper is the first regulated fund in Australia to recognise the particular tax benefit that a member is creating when moving between our Accumulation and Income accounts, and we’ve identified a way to credit the capital gains tax liability back to an eligible member in the form of our Income Account Transfer Bonus1.
1. The QSuper Income account Transfer Bonus is only payable to eligible members when they transfer from a QSuper Accumulations account to a QSuper Income account. More information is available in the Accumulation account guide.
The views of the author and those who provide the responses to comments posted on this blog are not necessarily the views of the QSuper Board. We’ve put this information together as general information only and you should get professional advice before relying on this information.
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Project Manager, Investments
Philip is a Consultant at Picotaur Solutions and has led a number of key QSuper investment projects including the establishment of the infrastructure and processes for QSuper’s in-house trading capability, the transitioning of QSuper’s assets to a new custodian and most recently a project to identify and pay to members a tax benefit that occurs when transitioning from an accumulation to an income account.