Australian superannuation funds could be selling their members short by up to a combined $6 billion a year because they are not managing their tax positions and franking credits appropriately.
New analysis from financial services technology company GBST has pointed to the problem being centred on the funds’ capital gains tax (CGT) positions and the management of franking credits, with the firm’s business solutions executive, Kathy Taylor-Hofmann pointing to the need for vigilance.
“It is a fact that one of the most significant costs to members and their end retirement outcomes is the unnecessary excess payment of tax,” she said. “Superannuation funds can easily prevent these excess tax payments through simple tax management techniques as part of the investment process. They are entitled to do so as Australian tax paying entities.”
Taylor-Hofmann said there were two main tax rules which could optimise billions of dollars for superannuation members each year with the first being the management of CGT and the management of dividend income and imputation credits.
She pointed out that the CGT rules introduced by the Hawke/Keating Government and modified by the Howard Government entitled superannuation funds to a one-third discount if assets were held for more than 12 months before being sold.
This meant billions of dollars a year could be retained for members by preventing assets being sold too early and therefore not receiving the 33.33 per cent discount on the sales proceeds before calculating tax.
Taylor-Hoffman said that, similarly, funds could better manage their dividend income and imputation credits by ensuring shares were not sold within 45 days but conceded that superannuation funds were challenged by the volume of shares they dealt with across multiple managers.
Backing Taylor-Hoffman’s assessment, KPMG’s Dana Fleming said the largest controllable part of a superannuation fund’s tax payable was CGT.
“With nearly all superannuation funds now back paying tax on their realised net capital gains, all strategies that assist in ensuring the 1/3 discount is accessed where possible and deferring the payment date should be closely examined,” she said. “In conjunction with the active management of franking credits, this can have a significant impact on returns to members over time.”