Local investments give real returns, but super wins on tax

Superannuation has been confirmed as one of the most tax-effective long-term investment options for high-income-earners, while Australian shares and Australian listed property have provided the best ‘real’ returns over the past two decades, according to this year’s ASX/Russell Long-Term Investing Report.

The report investigates the performance of various investments over 10 and 20 years to get a picture of ‘real’ returns, taking into account the impact of personal tax rates, the tax treatment of assets, and cost associated with different investments.

Russell Investment Group’s Asia Pacific chief investment officer Peter Gunning said the report highlighted the impact of tax and reminded investors of the cyclical nature of markets, and the dangers of market timing.

He said the changes to superannuation announced in the Federal Budget would allow high-income earners to invest at 15 per cent, and take advantage of improved returns of the lowest marginal taxpayers.

The report showed personal tax had a greater negative impact on fixed interest and cash investments, compared to shares.

Australian shares were shown to have achieved the highest return over the 20 years measured, delivering average annual after tax returns of 12.4 per cent, and 10.4 per cent at the lowest and highest marginal tax rates respectively.

Over the 10 years to December 31, 2005, Australian listed property outperformed other asset classes at both the lowest and highest marginal tax rate, delivering average annual after tax returns of 12.6 per cent and 10.4 per cent respectively.

“While the report presents a useful view of long-term investment performance, it is, unfortunately, not indicative of how asset classes might perform in the next 10 or 20 years,” Gunning said.

Australian residential property markets also did well, outperforming Australian shares at the lowest marginal tax rate, but equalling them in performance at the top marginal rate, when taking gearing into account.

Australian Stock Exchange (ASX) deputy chief executive officer and group executive, markets, Colin Scully said the All Ordinaries Index experience had been strong during the past 10 years, while the housing market had experienced an upswing until 2004.

“Showcasing that volatility is prone to all markets, this report emphasises that diversification is needed to accommodate the inevitable rises and falls of any particular asset class,” he said.