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.Also worthy of note is that the difference in tax take for the Revenue is nowhere near as large.
The DD fund over 20 years will pay a total of €97,198 in tax (at 41% at 3 occasions, year 8, 16 and 20).
The CGT fund will pay approx. €86,780 in tax (at 33% once at year 20).
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%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.
"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
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.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
Hi @Zenith63 do you mind if I ask why? Would your logic also apply to individual shares? Guessing no due to diversification.If you're investing in 10-20 ETFs, which might bring about the desire to offset losses, you're probably using ETFs incorrectly.
I think the crux of the discussion centres around the purchase of a single instrument to give broad diversified exposure to “the market”.Hi @Zenith63 do you mind if I ask why? Would your logic also apply to individual shares? Guessing no due to diversification.
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.The Advantages of a CGT Fund (e.g. an investment trust like SMT) VS a Deemed Disposal Fund (e.g. an ETF like VNRA) really is highlighted when you choose funds with low or no dividends (like the 2 examples).
Assuming 0% dividends a year and 7% capital gains - net of all charges!
After 8 years:
1. Deemed disposal €142,373
2. CGT Fund: €148,118
3. CGT Fund (utilizing annual €1200 TFA): €151,286
After 20 years:
You can see the CGT Fund outperforms the DD fund in all cases but the difference is huge after 20 years for someone who diligently harvests their 1200 euro tax free allowance each year, 300K vs 240k. Almost 60K in the difference. Also this applies to both top and bottom rate tax payers equally.
- Deemed Disposal Fund – €239,870
- CGT fund – €292,269
- CGT fund (utilizing annual €1200 TFA) – €300,189
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.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 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 …anirishinvestorsguide.com