This article is from the Australian Property Journal archive
INVESTORS who played their cards right by investing in Australian shares have received the best ‘real’ returns compared to residential and real estate investment trusts investors.
According to the Russell Investments/Australian Securities Exchange’s Long-Term Investing Report, Australian shares outperformed all other investment sectors, delivering the best after-tax and after-cost returns at the lowest and highest marginal tax rates across the last 20-year period, with a return of 9.9% p.a. and 7.8% p.a. respectively. This was also the case at the superannuation tax rate.
This is because for the 20-year period at the top marginal tax rate, Australian shares have the lowest effective tax rate payable at 20% on investment returns, due to the Australian dividend imputation system, compared with residential investment property at 26%. Cash and bonds have the highest effective tax rates, both at 49%.
The most profound contrast in effective tax rates is between Australian and Global REITs at 26% and 39% respectively. The report accounted for the 13% difference as being a result of the tax deferral portion of distributions for Australian REITs.
However, on a before-tax and after-costs basis, the residential investment property sector outperformed all other sectors at 9.8% p.a. Australian shares (9.7% p.a.) and Australian bonds (8.9% p.a.) over 20 years.
AREITs delivered (7.5% p.a.) which outperformed their overseas counterparts, global REITs (5.9% p.a.) over the same period.
Russell senior consultant Stanley Yeo said many investors were unaware of the impact taxes and fees have on returns.
“It is important for investors to consider that tax is essentially a cost of investing. Our results show what a significant difference it can have on the end outcome for investors.
“We believe after-tax returns will have an increasing importance for investors against a backdrop of the financial services and tax reforms currently underway in the local market,” he added.
The latest Report reinforces that superannuation remains the most tax-effective way to invest.
The report also looked at the impact of borrowing on investment performance, factoring in a 50% gearing ratio for the most commonly geared assets – Australian shares and residential investment property.
In this scenario, at both the lowest and highest marginal tax rates, residential investment property outperforms Australian shares, partly a result of lower lending rates.
Yeo said investors should view the volatile short-term return patterns as a normal part of investing in growth-type asset classes. Australian shares in particular experienced significant falls as a result of the global financial crisis. However, rebound at the end of 2009 lessened the severity with an impressive return of 37.6%.
“Generally speaking, growth assets like shares and AREITs will experience greater short-term volatility, yet will commonly provide higher long-term returns than defensive assets, like bonds and cash,” he concluded.
Australian Property Journal
