Many providers use offshore vehicles vulnerable to double tolls
KiwiSavers could be missing out on higher returns because of the tax impact of their providers’ offshore structures, a report says.
Jamie Young, the author of the report and a partner at Castlepoint Funds, said the issues were largely due to a lack of coverage by New Zealand’s double-tax treaties.
Young said they did not provide for investments made by providers who used vehicles in countries different from where they sourced their investment funds and where investments were ultimately made.
Many KiwiSavers providers use offshore structures, particularly those based in Australia, vulnerable to this tax double sting.
Young said matters were acute for funds with a higher risk tolerance, as international equities were more likely to run into the issue when dealing with dividend payments.
Double-tax agreements allow the granting of Foreign Tax Credits on withholding tax paid offshore on dividends, which can then be used to offset tax in NZ. This loss, effectively in transit, can be significant.
Young crunched the Vanguard Total World Stock fund for the 2016 calendar year and found giving up Foreign Trade Credits (FTCs) would cost investors 37 basis points, or deducting 0.37 per cent from annual returns.
“If you are invested into higher dividend-paying global funds, such as infrastructure, the FTCs could be materially higher. This is essentially an additional fee for investing in a fund with an inefficient tax structure,” Young said in his report.
The results of a reduction of a fraction of a per cent in returns can be consequential. Over time, it dramatically reduces compound earnings and mean there’s less available for KiwiSavers when they retire.
Young said the issue of fund taxation was a common topic at higher levels of fund management, but this had not yet filtered down to retail investors.
“It struck me that no one on the retail end seems to have any idea about the tax efficiency side of things,” he said.
He called for clearer reporting of taxes paid by providers, which was similar in consequence for investors to fees charged.
“There is a bit of push to show returns after tax, as well as before tax, but there’s so many other things in there, fees and everything else, to easily compare what tax one fund is paying with another. It’s not easy to find,” Young said.
“All else being equal, it is worth paying up to 0.50 per cent more in fees to invest in a fund that holds foreign equities directly,” he said.
HKiwiSaver funds under management: $35 billion Effect on returns from double-tax for typical international equity fund: -0.34% a year. Potential annual worth in using provider who holds international equities directly: 0.50%
Rebecca Howard
Consumer sentiment rose in January to its highest level since April 2015 as economic momentum continues, according to the ANZ-Roy Morgan NZ Consumer Confidence index.
The consumer confidence index rose 4.2 points to 128.7 in January, with the current conditions index up 4.7 points to 129.8 and the future conditions index up 4.0 points to 128.1.
“The summer weather might be dodgy so far, but consumers have started 2017 on a high,” said ANZ chief economist Cameron Bagrie.
Bagrie said there were good reasons for the optimism, including a solid run in job ads, modest inflation and an huge improvement in the outlook for dairy.
The housing market may be levelling out, although Bagrie noted “property-owning households have been given a huge wealth boost”.
The survey of 1000 people found a net 34 per cent of respondents said they were better off now than a year ago and a net 48 per cent expect to be better off in 12 months time.
In December, a net 36 per cent said they were better off while a net 46 per cent expected to be better off in 12 months time. A net 65 per cent of respondents see now as a good time to buy a big-ticket item, versus 58 per cent in December.
The survey found a net 25 per cent of respondents were optimistic about the economy in the coming 12 months, up from 22 per cent in December while a net 25 per cent were upbeat about the next five years versus a net 18 per cent in December.
On inflation, prices are expected to rise an annual 3.7 per cent in the next two years, compared to 3.4 per cent in December. House prices are seen rising at a 4.3 per cent annual pace. —
Cameron Bagrie