Why tax optimisation is the next fund frontier

Smart tax technology powers intelligent tax investment management.

Funds are being challenged to keep up with regulatory changes, customer expectations, and the commercial imperative to do more with less. With tax often the largest outlay, optimising tax with intelligent technology is the low-hanging fruit for funds focused on achieving great results for their members.

Opportunities for technology to power tax management strategies can be found throughout the investment cycle, from pre-trade insights to post-trade tax analytics. No matter where it’s used, technology ultimately improves member returns – either directly through smarter investment decisions or indirectly through operational efficiencies.

The power of ‘what if'

With the Productivity Commission’s report into the superannuation sector estimating tax inefficiency costs between five to 200 basis points (bps) per year — and that a 20bps bump over a working life can improve member’s retirement balance by 5.4% — there’s good reason to get proactive.

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New technology solutions such as pre-trade analysis tools are designed to take the complexity out of tax consideration in trading for investment managers. These tools also include other value-add capabilities such as modelling tax scenarios, managing overlays and providing access to real time tax data.

But the true pay-off may be the birds-eye view of the fund itself; managers can see the tax view of specific trades and an actual view of what their fund will pay to optimise tax at a whole-of-fund level. Importantly, they can do all this without significantly impacting their day to day trading activities.

Since the Cooper review and MySuper legislation requiring funds to take a proactive approach to tax, more funds are willing to be trailblazers and champion intelligent tax. The Productivity Commission agrees that pre-tax optimisation is a positive tax management strategy. They’ve commended funds like Mercer, Australian Super and UniSuper for taking their tax obligation seriously and embedding tax aware technology across their portfolios.

Diving into the analytics

To truly make the most of tax aware investing, funds should look to pre-trade analytics to make informed decisions as well as post-trade optimisation and measurement of the outcomes.

Post-trade tax optimisation is available to all superannuation funds. A scare many years ago in the industry led to funds seeking specific taxation rulings to provide peace of mind that they could optimise tax post-trade. The ability to optimise tax post-trade is a service readily available to funds, so to maximise the potential benefits, both pre-trade tax analysis and post-trade optimisation should be implemented.

Benefits of using tax analysis tools and services can be measured though implementing after-tax benchmarking and performance measurement. Benchmarks can be customised to take into account Capital Gains Tax, franking credits and off market share buy backs. Post-trade tax focused performance analytics can provide insightful reporting on savings achieved.

Time to embrace tax tech

For an industry already pushing forward with customer facing technology like chatbots, customer portals and artificial intelligence, there’s a valuable case for applying the same innovative approach to tax management.

An intelligent approach to tax optimisation pre and post-trade is a win-win for funds and members. Are you putting tax technology to work for your fund?

Kathy Taylor-Hoffman is Business Solutions Executive at GBST.