Funds looking more closely at tax parcel optimisation, says DST Global Solutions Australia
Superannuation funds, government funds and multi-mandate managers may be missing out on tax efficiencies, a solutions expert said today.
“With more sophisticated systems investment managers and asset owners are starting to consider the advantages of tax parcel optimisation services,” said David Rhind, DST Global Solutions regional solutions head, speaking at the Post Tax Performance Measurement Forum in Sydney. “Tax parcel optimisation can be used in both rising and falling markets, resulting in either current or future benefits”.
Tax parcel optimisation (TPO) is a process which allows asset managers and asset owners to reduce tax through appropriate parcel selection when selling shares. The aim of TPO is to lower taxable realised and unrealised gains by making use of parcels eligible for capital gains tax discounts.
Asset owners may use TPO at either the portfolio manager or the tax paying entity level. There is usually a greater tax benefit with the tax paying entity level TPO as parcel selection is applied across all managers in a fund. This is different to traditional methods where selection is only applied to the selling manager.
Rhind said that when parcel selection is used across multiple managers, multiple positions and multiple trades the tax benefits can be significant. “Tax benefits should be considered alongside other fundamentals and analysis that managers examine prior to trading. However, delivery of timely and meaningful tax parcel information across managers in a fund, whilst retaining necessary privacy, is a hurdle that the industry needs to overcome,” he said.
One method which asset managers can use to activate TPO is the Propagation function in DST Global Solutions’ HiPortfolio, which enables TPO to be run across multiple portfolios efficiently while minimising risk. This was recognised in consultant Towers Watson’s After Tax Report – After Tax Investing in Australian Shares (January 2011) which said "Propagation has the potential to both defer the payment of tax, and permanently reduce the level of tax payable". This is the primary aim of TPO.
According to the Cooper Review and other sources, tax is the single biggest expense for most superannuation firms*. TPO, therefore, offers an important part of the overall approach to improving post tax performance.
DST Global Solutions is a leading provider of technology and services for the global investment management industry and its clients include some of the world’s largest asset managers and custodians.. The company is the investment accounting market leader in Australia with over 20 year experience with more than 40 clients in Australia and New Zealand. DST Global Solutions has more than 20 years of experience in the Australian market.
*KPMG, APRA Quarterly Superannuation Performance’, March 2010; Cooper Review
