Australian superannuation funds have one of the highest allocations to equities among Organisation for Economic Cooperation and Development countries, given imputation credits and capital gains tax (CGT) discounts, according to a University of New South Wales academic.
Australian School of Taxation associate head Gordon Mackenzie said the allocation to equities was distorted by tax rules, but super funds said the relatively high allocation was entirely legitimate.
"Such an allocation on the basis of preferential tax outcomes has been said to be 'a questionable practice' in terms of appropriate asset/liability management practices," Mackenzie said in his paper, "Tax Distortions and Retail Investments".
But superannuation funds said the high allocation to equities could be explained by factors other than tax considerations, including the structure of Australia's super system and the robust returns equities gave over the long term.
"In Europe, but also in the US, defined benefit (DB) schemes are a very significant part of the retirement system. But here we have a defined contributions system. So the allocation to equities is higher because structurally our system encourages super funds to hold more in growth assets such as shares rather than DB schemes, which aim to match their assets with their liabilities," Vanguard Investments corporate affairs and market development principal Robin Bowerman said.
"But if you looked at defined contribution schemes in the UK or the US and examined their allocation to equities, I think the allocation would be similar to ours and the experience in the US suggests that. So I don't think that tax is distorting how super fund assets are allocated."
Bowerman also said minimising tax costs was a valid strategy for super funds.
"From a trustee's point of view, they would focus on keeping the tax bill down and it's a legitimate thing for the trustee to take tax into account as it affects returns to members."
AustralianSuper head of operations and services Peter Curtis said the fund's asset allocation strategy took into account a wide range of factors, not just tax.
"As a long-term investor we look to invest in a range of assets that present an acceptable risk and return," Curtis said.
"We believe the long-term returns provided by equities generally are the prime reason for their large allocation in the investment portfolio to maximise returns to members."
He said while AustralianSuper was a long-term investor that encouraged its managers to hold equities to be able to take advantage of the CGT rules, "our managers are the ones who ultimately make the decisions about what stocks they buy and how long they hold them for".
Colonial First State senior technical manager Tim Sanderson said the CGT discount applied to any asset that could experience capital growth, not just to shares.
Sanderson said the imputation system might provide an incentive for funds or individuals to hold shares, but the system "simply refunds tax already paid on that dividend".
Mackenzie's paper also stated the "most obvious" tax aspect influencing where assets were held by investors was the tax preferences given to superannuation funds.
"For an investor over age 60, a superannuation fund that has paid tax and is now paying a pension is, in effect, a tax-free savings vehicle with neither tax on earnings or on distributions," he said.
But Bowerman said super tax concessions were needed to offset the fact savings were locked up effectively for a person's working life.
"So the tax concessions are a reasonable trade-off for the restrictions on accessing your savings," he said.
Sanderson said the tax concessions were there "to encourage people to save for their retirement".
"But there are a range of limitations on what you can put in, including in terms of pre-tax contributions, and when you can access your savings. So it's not something you can use to help you meet financial goals that you may have prior to retirement," he said.
