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Self Managed Super Fund (SMSF) Article
Avoid the tax maze with a wrap account
By Tony Negline.
This article may be out of date.
25th November 2008
Tax planning is always an important attribute of all wealth creation. It's also essential to minimize the administration hassles of keeping track of investments.
These are good objectives regardless of the state of financial markets.
The more tax efficient and administratively efficient an investment the cheaper the overall costs. The lower the costs the greater the wealth creation.
When an investor places money into a managed fund they are effectively buying units in a trust. The trust distributes income and all tax impacts are passed directly through to the investors.
Anyone who has held more than three or four managed funds plus some listed securities knows the hassle of keeping up to date with all the paper work and particular tax impacts of each managed fund.
For example when a managed fund is purchased or sold, Capital Gains Tax has to be worked out based on the difference between the unit prices when that fund is bought and sold.
About 15 years ago fund managers began creating an administration service which allowed investors to more easily invest in many managed funds and listed securities. For a relatively small fee investors only have to deal with one organization when placing or redeeming all their investments including receiving one regular report showing the value of all their investments.
Internally the industry likes to call these platforms or wrap accounts. Some of these wrap accounts provide access to over 400 managed funds and all ASX listed securities.
These wrap accounts did much to make the financial services industry more efficient.
One problem administration platforms did not solve was the capital gains tax impost from investing in different managed funds. Investors are still buying individual investments in each managed fund and listed security and dealing with the individual tax impacts that arise in each case.
Recently Perpetual released a product, called Wealthfocus Investment Advantage, which seeks to solve these capital gains tax problems.
Perpetual say their new product, which has a tax office Product Ruling, provides three important CGT benefits:
- CGT-free switching – it's possible to use this product to move between different managed funds without triggering any CGT impacts
- CGT-free partial withdrawals until the cost base is reduced to zero. Partial withdrawals will not incur CGT unless the withdrawal amount exceeds the cost base of the unit
- If the initial investment is held for more than 12 months, the CGT discount applies to all investments regardless of how long the investment has been in place
This product is an important evolution and helps to strip out an important cost.
At this point in time this new product provides access to over 70 managed funds. It cannot be used for listed securities.
Gai Ferrington, Perpetual's General Manager for Wealthfocus, says that she intends to review the range of managed funds annually.
Investors with non-super money and Self Managed Super Funds can use this product.
Because of the way super is regulated it is doubtful this structure could be used in a retail superannuation environment.
Ferrington says that financial planning groups have shown a very strong interest in this new offering. No doubt some other platform providers are frantically looking at this new Perpetual product and working out how they might be able to release a similar product.
Perpetual has this innovation to itself for the moment.
Some wrap account products are only available via a financial planner. This new Perpetual product is available via planners or directly from Perpetual.
Of particular interest to some investors will be the cost of accessing this product. Across the wrap accounts marketplace total costs, including financial advice, can vary between 1.8% and 3% of assets invested.
Perpetual elected to offer this product at the lower end of the fee spectrum for wrap style products even though they probably could have charged a premium to access this new innovation.
At a recent Association of Superannuation Funds of Australia seminar Senator Sherry, Minister for Corporate Law and Superannuation said he would like Australia to "move towards a superannuation system with a more sustainable remuneration model, in which fees are more competitive by world standards."
A spokeswoman for Sherry said that the Minister would like the average fee across the whole superannuation industry to be 1.25% instead of a current average of 2%. Ideally he would like a total fee of 1%. Sherry believes that this fee should cover all costs including trusteeship, administration, reporting, custodianship and financial advice.
The average fee for self managed super funds seems to be about 1.4% of total assets under management. Deloitte Touche Tomatsu say they expect this will fall to about 1.25% of assets by 2021.
Alex Dunnin, from Rainmaker Research, told DIY Super that most Industry Funds have an average fee of about 1.5%. For an account balance of $50,000 Industry Funds charge on average of about 1%.
The super industry is expecting Sherry to make an announcement about how he wants all super funds to lower their fees before the end of this year. The industry will be interested to know how Sherry intends to change industry practice and over what period of time. Will he encourage or enforce? Will he seek to ban inbuilt ongoing financial advice fees which add between 0.4% and 1.0% to total fees?
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