Topic 7: Taxes

Question 1

Tax and Super (4 types of super fund options)

Answer 1

1. Retail Funds = - expensive
2. Industry Funds = Cheap (but issue of capital reserves required by Cooper?), good track records
3. SMSFs = Growth area, but can be expensive and administrative burden.
   - Benefit = choice/flexibility
4. Small APRA Funds (“SAFs”) = Like SMSF but outsource trustee & admin roles

Question 2

Tax on Superannuation

- Accumulation phase

Answer 2

Accumulation phase:

• Earnings and short term gains taxed at 15%
• Long term gains taxed at 10%
• Contributions taxed at 15% (why people like making additional contributions & why Govt sets caps on contributions)

Question 3

Tax on Superannuation

- Drawdown phase

Answer 3

Drawdown phase

• Once stop working can no longer make contributions
• Income and gains tax free!!!!
• Lump sum payments to dependents tax free (applies above too)

tax may be payable if to non-dependents

Question 4

Tax - factors (4)

Answer 4

1. Concept of tax year, may cause sales/deferrals (albeit really just timing cash flows)
2. Marginal tax rate on net income, which includes capital gains
   - 47% plus 2% Medicare (for every dollar above $180k), perhaps flood levy, disability levy….
   - Company rate is 30%
   - Gains on asset held at least 12 months (but add extra day as Act very specific, so need record time of day bought if sold on anniversary), only include half in net income
3. Negative gearing
4. Gearing in SMSFs

Question 5

Trusts and Partnerships

Answer 5

Trusts & partnerships

• Income taxed at beneficiary/partnership level
• Income not distributed is taxed in nasty manner
• Ability to income split, so lots of anti-avoidance provisions
• Trusts useful for asset protection

Question 6

Franking Credits

Answer 6

Franking credits

• Reduce tax on dividends to extent company paid
• More valuable the lower your tax rate
• For non-taxpaying investors, can get a cheque from the ATO for franking credits, but limits
• Companies receiving fully franked dividends pay no tax on those dividends

Question 7

Private Ancillary Funds (PAF’s)

• Purpose
• Tax benefits

Answer 7

Purpose:

• Philanthropic motive
• Naming rights for low cost
• Control
• Ongoing purpose form them & children

Tax benefits

• Immediate deduction for money and transfers into PAF (same as if gave away)
• Guidelines from ATO: 5% minimum distributions; Name of fund and post code on public record

Question 8

After tax PWM

Answer 8

Post tax optimisation: why
–At 46.5% MTR can see huge impact
–Even 15% over 30 years is large

–Models in PWM literature pretty much useless, not implementable and authors always conclude by telling us what we know anyway
–Better approach is modelling software and judgment

Question 9

Tax issues

- turnover

Answer 9

Turnover:

• Turnover hurts ATRs unless loss harvesting
• After tax volatility less than pre tax volatility (see compression between 95thand 5thpercentiles in simulations)

Question 10

Tax inefficiencies of managed funds

SMAs

Answer 10

• Inherited capital gains
• Force sales due to large redemptions
• Potentially high turnover

SMAs

• Concentrated stock positions
• Diversify vs tax costs
• Hedge?
• Alternatives can be high turnover, all income and short term gains