Best of the Best 2024: Tax Aware Investing

Generation Life has been named Money's Tax Aware Investing innovator as part of the Best of the Best awards.

Many investors forget to take into account their investments' after-tax return and assume the headline performance number is the real return. But this can be short-sighted.

Data at life insurance business Generation Life indicates a fund's 10% headline return could be as low as 4% when taking into account its after-tax performance.

Its tax-aware investment bonds seek to address this with a unique legal structure that maximises tax rules to offset capital losses against income.

The business has $2.7 billion in funds under management (FUM), of which $1.4 billion is in tax-aware investments.

This part of the group's business took off after the introduction of the superannuation transfer balance cap in 2017, which prompted the Generation Life team to develop the structure.

The cap limits the amount investors can keep in the tax-effective super environment to $1.9 million at present, prompting many to look for tax-effective investment options outside the retirement savings system.

"Many investors don't understand true performance. It's one thing to look at a gross headline performance number, but after-tax performance looks quite different," says CEO Grant Hackett. "Our tax-aware approach has produced amazing outcomes for investors."

Tax aside, Generation Life closely manages many of the bonds' other elements to generate the highest possible return. This includes the mix of growth versus income-producing assets, losses available to be maximised for tax purposes and franking credits.

"We manage the after-tax performance rather than the headline performance, because investors get to keep the after-tax performance," says Hackett.

Hackett expects investors to start paying more attention to after-tax returns in a persistently low-growth environment. "If you're generating an extra 1% to 2% on an after-tax basis, that's material, especially when you take into account the effect of compounding over time."

Investment bonds have other attractive attributes that contribute to their popularity.

For instance, they may be bequeathed to a beneficiary through a binding nomination, so they are able to bypass the bondholder's estate. Consequently, Generation Life is developing its estate planning capabilities.

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