14 Aug What do you actually earn on your investments after tax?
What do you actually earn on your investments after tax?
Unit trust managers are generally measured on the pre-tax returns of their funds. This makes sense in an industry where a substantial portion of the investments are retirement saving, also known as compulsory money. So, what does this mean? Returns in Pension Funds and Retirement Annuities are generally taxed in the hands of investors once they retire, whereas discretionary savings, such as excess cash invested in a Unit Trust attract dividends withholding tax, income tax on interest and capital gains tax now.
Things are changing
In the latest draft Taxation Law Amendment Bill (TLAB) the Treasury has proposed changing the tax treatment on the disposal of assets within a unit trust. Treasury’s proposal to the unit trust industry is that a gain made on the sale of an asset, which was held for less than 12 months, be treated as income in nature and not capital.
Driving performance… down.
As the industry emphasises pre-tax returns, it is unlikely that portfolio managers will differentiate between the two investment groups. But this proposal would drive after-tax performance of unit trusts down for discretionary investors. In a country with an already poor savings culture this has the potential to discourage long term saving or drive investors to invest in regions that are more tax friendly or in to life wrappers. This may also make it more difficult for companies to attract new capital, further impacting on economic growth.
Even if the proposal is not implemented, this once again highlights the need for investors to ask:
“What are you actually earning on your investments after tax?”