Synthetic ETFs have a disadvantage in Austria when it comes to taxes
Passive investment funds, often referred to as Exchange Traded Funds (ETFs), which replicate an index synthetically with derivatives, have a tax disadvantage in Austria compared to physically replicating index funds, which can reduce net performance by 0.1 to 0.2 percentage points per year. This is what the Austrian ETF investor found in a German securities forum. Tax experts confirm that replicating ETFs are more predictable when it comes to tax.
“In fact, swap-based ETFs usually have a higher proportion of realized and therefore taxable capital gains,” explains Thomas Wilhelm, CEO of the Association of Foreign Investment Companies in Austria (VAIÖ) and partner at the tax consultancy giant EY, who and his team advise around 10,000 foreign investors Funds, including many ETFs such as those from iShares, represented in Austria on APA request.
This circumstance can lead to over-taxation of swap ETFs. “Yes, with swap-based ETFs it can indeed be overtaxed (in relation to performance) during the holding period, but should ideally be balanced out again at the time of sale,” says Wilhelm. However, if the sum of the previously given capital gains tax exceeds the tax that is due at the time the tax is reached, overtaxation can only be compensated for if you hold other securities from which you can make a profit in the same calendar year.
Basically, if there is no or hardly any capital gains tax (KESt) during the holding period, but only when the security is sold, there is a tax assessment effect that, the longer you hold the fund, has a positive effect on the return due to compound interest. If, on the other hand, a large part or even too much capital gains tax is due during the holding period, investors will lose this effect. There is also the question of when and how much capital gains tax is due. This tax deferral effect is greatest for physically replicating, accumulating stock ETFs.
As Wilhelm says, fully replicating ETFs are tax predictable. The reason for this lies in the different compositions of the funds and the taxation regulations in Austria. This is because fully replicating funds actually hold the stocks that are represented in the relevant index. Realized capital gains usually only occur with index adjustments or larger unit redemptions. Synthetic ETFs, on the other hand, do not invest directly in the stocks included in the index, but hold completely different stocks as a base portfolio. The performance of the base portfolio is exchanged for the performance of the index to be mapped. This often leads to a significant realization of profits during the year.
In Austria, the taxation of securities and investment funds is based on the principle of transparency. This means that funds should be taxed as if the investor were holding the fund’s securities themselves. This also applies to barter transactions (swaps) and other derivatives, which means that the profits realized within a swap ETF are to be valued as so-called distribution-equivalent income that is subject to KESt annually.
The financial advisor and insurance broker working on a fee basis, Wolfgang Staudinger, who can use his start-up to calculate the performance of different investment forms and shells, says that the maximum difference when it comes to the question of whether the capital gains tax is incurred in full during the holding period for ETFs or only at At the very end of the savings phase after 30 years, with an assumed gross return of 7 percent, the maximum is 0.4 percentage points per year. Much more decisive with a multiple investment horizon is the choice of the shell, the commission-free, fee-based fund policy has a tax advantage compared to the securities account, which can amount to percentage points with high returns. Staudinger advises against swap ETFs for another reason, since with these it is not clear whether the counterparty risk associated with the derivatives will not come up.
ETFs are funds that come without a fund manager and only track an index such as the ATX or the DAX. With such passive funds, the costs for the investor are lower than with actively managed funds. According to the German Stiftung Warentest, global stock ETFs only cost around 0.3 to 0.5 percent per year. Conventional investment funds often cost three to five times as much, measured using the Total Expense Ratio (TER).