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With 30 June approaching, many investors will be reviewing their portfolios and considering the key changes they wish to make to their holdings. To ensure you don’t find yourself in hot water with the ATO, consider these key issues.
While it may be desirable to maximise your refund – or minimise your liability – tax should always be a secondary consideration when investing. This is particularly true at this time of year, as investors try to complete their transactions before the end of the financial year. After all, you’re trying to create wealth, and paying tax is a sign you’ve achieved that objective.
Whether buying or selling, ensure you can explain the purpose of your transaction in terms of its impact on your financial objectives – to create income in retirement, to build wealth, or whatever goal you’re working towards. Keep records if you need to. (If you have an SMSF, your investment strategy and trustee minutes need to be documented and can help here).
When you sell your shares (or other investments) at a profit, you are liable to pay tax on that gain. The good news is that only half the gain is included in your assessable income if you’ve held the asset more than twelve months, so the maximum you will pay on the total gain is half your marginal tax rate. Even better, if not all your investments have been successful, you can use losses from your poorly performing assets to offset your gains. You can even carry forward those losses if you have no gains to offset in a particular year.
You will need to incur a capital gains event in order to crystalise a gain or a loss. For shares this is relatively straightforward - your gain or loss is incurred when you order is filled; you will receive a contract note to confirm the amount and value of the transaction. For other assets, it may be less straightforward – the date of your CGT event for a property, for example, is the date the contract is signed, not the date the proceeds are received (when you settle). This can have considerable implications for transactions close to the end of the financial year, so try to consider which financial year you would like your transaction to fall into if you can.
Most investors can see the appeal of offsetting a gain with a loss, and can see scenarios in their portfolios that would eliminate a tax liability entirely if this strategy were employed. The ATO is obviously aware of this and to ensure that investors do not deliberately sell assets and rebuy them to minimise their tax, has prohibited the use of ‘wash sale’ arrangements.
A wash sale is where an asset is sold and then repurchased within a relatively short period of time, so there is no obvious change of investment strategy, and it appears the dominant purpose of the transaction is to minimise tax liabilities. You can read the ATO media release here.
One trap is disposing of an asset and then reacquiring it through a different entity, which the ATO also warns against. This would generally not include the in specie transfer of shares into an SMSF, but could include transferring assets into a trust. (The transfer is generally a CGT event). If you’re considering such a strategy, it is strongly recommended you seek professional advice.
A wash sale includes ‘substantially similar’ assets, which sounds ominous, but doesn’t, for example, include selling BHP shares and replacing them with RIO on 30 June. In this example, these companies, while in the same sector, may have very different prospects and performance, and the transaction can be justified as an investment-driven decision, not a tax-driven one.
For active investors, or even those who have favoured stocks and follow them closely, the challenge is ensuring that your transactions can be justified. As discussed here, it may be possible to sell a share and repurchase it shortly thereafter, if there is a substantial change in circumstances. If, for example, you chose to sell your CSL shares at $310, thinking they’d reached a top, and then repurchased two days later because they’d fallen to $250 thinking they were looking well priced, you should be able to argue this was an investment decision driven by a substantial change in the share price.
As an investor, the onus is on you to demonstrate that your investment decisions are not predominately tax-drive. If in doubt, speak to the ATO or to a tax professional. You are ultimately responsible for the tax liability, and your decisions, even if you’ve sought professional advice, but a good tax adviser can help you avoid pitfalls and demonstrate your intentions.
This information has been provided WealthHub Securities Ltd ABN 83 089 718 249 AFSL No. 230704 (WealthHub Securities), a Market Participant under the ASIC Market Integrity Rules and a wholly owned subsidiary of National Australia Bank Limited ABN 12 004 044 937 AFSL 230686 (NAB). Whilst all reasonable care has been taken by National Australia Bank Limited (ABN 12 004 044 937 AFSL 230686) (NAB) in preparing this material. NAB does not warrant or represent that the information, recommendations, opinions or conclusions contained in the material (“Information”) are accurate, reliable, complete or current. The Information has been prepared for information purposes only. Any statement as to past performance do not represent future performance. The Information is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Any advice contained in the Information has been prepared by WealthHub Securities without taking into account your objectives, financial situation or needs. Before acting on any such advice, NAB recommends that you consider whether it is appropriate for your circumstances.