Ben Brinkerhoff and Damon O’Brien, of investment solutions firm Consilium, have written a paper looking at the options for investment in foreign funds.

They said investing in FIF assets through a PIE structure would offer investors more convenience, with no tax returns required.

But using an Australian unit trust (AUT) would result in lower taxes over the long term.

With a PIE, an investor nominates a prescribed investor rate up to 28%.  Investors pay tax at that rate on 5% of the opening value of their FIF assets, whether markets go up or down - the FDR method.

With an AUT, they can choose the FDR method of a PIE fund, with a marginal tax rate of up to 33%,  or can opt to take into account the actual gains and losses of their portfolio.

“The advantage here is that if your aggregate FIF investments lose money - and all will from time to time - you won’t have to pay tax on those assets that year. However, if you invest through AUTs, you will need to file a tax return with the IRD.”

Brinkerhoff and O’Brien said an investor whose international portfolio lost 10% over the year, with a marginal tax rate of 33% and a PIR of 28% in a PIE, would end up 11.4% down after tax..  Someone in an AUT would only lose the 10% with the market, and pay no tax.

If the market gained 10%, the PIE investor would still pay 1.4% in tax but the AUT investor would pay 1.65%.

O’Brien said there was a general impression that PIEs were the most effective structure. “It’s become easy to talk about PIEs in a blanket way, that they are all tax efficient, and people stop inquiring.”

But he said when people were investing for the long term, they needed to consider that markets could drop as well as rise. “The fact is PIEs can’t opt out of paying tax but a unit trust can. That’s the part of the calculation that people need to be reminded off. In a normal good year the PIE may be better but the average over time may not necessarily be.”

O’Brien said AFAs’ code of conduct suggested that clients should expect tax considerations were being taken into account.

He said Consilium’s own filters considered tax as a consideration, along with a range of others.  “It goes to the underlying expected after-tax return. We don’t start with tax being the main priority.”