Key Post Which is better gross roll up or CGT investments?
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Duke of Marmalade
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This is an illusion of the time value of money which by the assumptions is 10% p.a. For example if the Revenue had reinvested the DD tax deducted at year 8 in this super fund they would have more than tripled its value.
The time value of money for Revenue is their cost of funds i.e. the rate which they can borrow money at, which is currently ~0.2%
Damn you Marmalade! Do you not think I have better things to be doing than calculating Net Present Values on New Years Day??? 
Unfortunately you are correct about me having nothing better to do but incorrect about the time value of money difference.
Net Present Value of Total Tax Collected by Revenue (assuming Rate of 0.2%):
Unfortunately you are correct about me having nothing better to do but incorrect about the time value of money difference.
Net Present Value of Total Tax Collected by Revenue (assuming Rate of 0.2%):
- Deemed Disposal Fund – €93,390
- CGT fund – €90,990
- CGT fund (utilizing annual €1200 TFA) – €83,380
Duke of Marmalade
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"Time value of money" was a loose explanation which you have taken literally. I don't blame you; I should have been more precise. Opportunity cost would have been a better term.Damn you Marmalade! Do you not think I have better things to be doing than calculating Net Present Values on New Years Day???
Unfortunately you are correct about me having nothing better to do but incorrect about the time value of money difference.
Net Present Value of Total Tax Collected by Revenue (assuming Rate of 0.2%):
- Deemed Disposal Fund – €93,390
- CGT fund – €90,990
- CGT fund (utilizing annual €1200 TFA) – €83,380
The reason the tax take in the CGT 20 year case seems high compared to the 8 year DD situation is that the Revenue has in the former situation effectively kept the tax that it would have deemed disposed invested in the fund earning for it, the Revenue, 10% p.a.
In short, the apparent anomaly between the two regimes which you have drawn our attention to is driven by the 10% p.a. that the funds were able to continue to earn. You might as well argue that the Revenue should reinvest all its CGT proceeds in the assets that produced the CGT.
Update: actually I think in your example that the opportunity cost to the Revenue of taking her money early is 7% p.a.
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The one huge advantage of investing in CGT fund which everyone has ignored is loss relief, that you can reduce your capital gains tax liability by selling investments that are under water, you can still buy them back after a month to get back in for any subsequent rebound. This is probably the biggest advantage of CGT funds. Hopefully the revenue will finally see sense and end the ridiculous regime of deemed disposal, no other European country has this ridiculous regime
I think that may be less relevant in the typical use case for ETFs by average punters like me though - regular investments in one or maybe two ETFs (MSCI World or S&P500 for example). If you're investing in 10-20 ETFs, which might bring about the desire to offset losses, you're probably using ETFs incorrectly.
Hi @Zenith63 do you mind if I ask why? Would your logic also apply to individual shares? Guessing no due to diversification.
This article includes some projections, with different assumptions around the contributions of dividends and capital gains to total return -
anirishinvestorsguide.com
Taxation of ETFs in Ireland
Minor edits: Jan 2021 regarding the purchase of US ETFs via Tradestation.com (uses Interactive Brokers platform) Important Note (March 2022): The below article assumes ETFs domiciled in the US are …
anirishinvestorsguide.com
Gordon Gekko
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interested21
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Are we at risk of throwing the baby out with the bathwater by avoiding ETFs due to the gross rollup?
Historical performance suggests that over time it is almost unheard of for investors to have consistent enough performance to end up ahead of the index. This includes retail investors like you and I if we are picking stocks ourselves, or professional managers like those running the IT that fall under CGT.
Over the same period, IWRD (iShares Distributing All World Index) has achieved a 250% price increase. This is slightly behind FCIT in performance. However if we instead look at SWDA (this is the accumulating equivalent), that has achieved 340% growth in this time. FCIT does pay dividends, so it is more comparable to a distributing ETF, however the yield is roughly the same as its fees (~1.2%), so I think we can discount this and compare it against the accumulating ETF.
This is just one example and it's something I'd be interested in getting other's opinion on. Are we potentially letting the tax-tail wag the dog and turning down better gains (and a better net position) to minimise our tax bills?
Historical performance suggests that over time it is almost unheard of for investors to have consistent enough performance to end up ahead of the index. This includes retail investors like you and I if we are picking stocks ourselves, or professional managers like those running the IT that fall under CGT.
This unsurprisingly shows that CGT ends up ahead of we assume the same growth rate for both options, but how realistic is this? I picked a random example of comparing FCIT and an All World Index over the last 16 years. This period has seen a solid 258% increase in the price of FCIT.
Over the same period, IWRD (iShares Distributing All World Index) has achieved a 250% price increase. This is slightly behind FCIT in performance. However if we instead look at SWDA (this is the accumulating equivalent), that has achieved 340% growth in this time. FCIT does pay dividends, so it is more comparable to a distributing ETF, however the yield is roughly the same as its fees (~1.2%), so I think we can discount this and compare it against the accumulating ETF.
This is just one example and it's something I'd be interested in getting other's opinion on. Are we potentially letting the tax-tail wag the dog and turning down better gains (and a better net position) to minimise our tax bills?
The fees are already accounted for in the capital gain. You'd be accounting for them twice if you take them out of dividends. So the performance is probably very similar over the time period that you chose. However, it is likely that FCIT takes on more risk than IWRD. It has 11% leverage and is less diversified than IWRD. In a taxless world I would definitely pick IWRD. But in my opinion the Irish tax treatment of ETF's (which are the best investment choice in every other country in the world) make them the least attractive investment option in Ireland.
interested21
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Thanks AJAM, good spot. I think you've summarised it well - performance in the case of these two particular investments is similar, but with a lower risk in the ETF option it would be the better investment (if tax was equal).
This seem to be a good article and highlights some of the challenges with the exit tax approach beyond the actual amount you pay, namely the relatively complex reporting procedures. If I was wanted to put some of my earnings into an ETF each month, I'd have to declare each purchase, and in 8 years time (and every 8 years thereafter) I'd have to figure out my deemed disposal obligations for each month of the year, which would be a tedious enough affair compared to the relatively simple capital gains tax procedure. To me, this reporting procedure is more offputting than the headline rate itself.
This article includes some projections, with different assumptions around the contributions of dividends and capital gains to total return -
Taxation of ETFs in Ireland
Minor edits: Jan 2021 regarding the purchase of US ETFs via Tradestation.com (uses Interactive Brokers platform) Important Note (March 2022): The below article assumes ETFs domiciled in the US are …
This seem to be a good article and highlights some of the challenges with the exit tax approach beyond the actual amount you pay, namely the relatively complex reporting procedures. If I was wanted to put some of my earnings into an ETF each month, I'd have to declare each purchase, and in 8 years time (and every 8 years thereafter) I'd have to figure out my deemed disposal obligations for each month of the year, which would be a tedious enough affair compared to the relatively simple capital gains tax procedure. To me, this reporting procedure is more offputting than the headline rate itself.