Averaging up question

Hi there,

Just that I haven't done this before, I'm not sure what or if there are any issues with averaging up.
Say, if I buy two lots of XYZ shares at different prices. And then, sell one lot some time later. Which lot would be sold first?
How can I differentiate between the two lots? Or, do I have to? Presumably for reporting on any tax/profit gains?

G'day ezyTrader,

There is an issue with entitlement to franking credits & the 45 day rule.

For the purpose of the holding period rule, if a shareholder purchases substantially identical shares in a company over a period of time, the holding period rule uses the ‘last in first out’ method to identify which shares will pass the holding period rule.

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I had this problem last month when I purchased CBA in 3 parcels.....2 of the parcels were well over the 45 days, however, the 3rd was much less.

This rule does not apply if your total franking credit entitlement is below $5,000

see “45 day holding period rule”

I think the normal rules are first bought is first sold. this goes for taxation reasons as well, unless you can show good reason for it to be treated differently

kaveman said:

I think the normal rules are first bought is first sold. this goes for taxation reasons as well

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The ATO allows you to choose whichever shares you want to sell - whatever gives the best result for you.

From NAT4151 - Guide To Capital Gains Tax 2006, under the section "Identifying Shares Or Units Sold":

If you have the relevant records (for example, share certificates), you may be able to identify which particular shares or units you have disposed of. In other cases, the Commissioner of Taxation will accept your selection of the identity of shares disposed of.

Alternatively, you may wish to use a ‘first in, first out’ basis where you treat the first shares or units you bought as being the first you disposed of.

In limited circumstances, the Tax Office will also accept an average cost method to determine the cost of the shares disposed of.

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As mentioned in another thread recently, I usually sell the ones with the highest purchase price first, as that minimises gains or maximises losses.

GP

Thanks all for your replies.

GP, would you mind posting the link for your recently discussed thread pls?

I had been in a couple of trades which I intend to hold for a while now as they are trending up, but at the same time, perhaps, trade in trend for slight profit. So, as I understand that the 45 day holding rule may not apply in my case (these stocks are non-divvy, pardon me, is that the right terminology???)

I guess I'm still a REAL newbie. So, still in dilemma, how can I prove to ATO, that I intend to hold the original lots of shares, and sell the latter ones (higher priced) as part of the trading plan?

Would this be the better approach, or can someone suggest other options that I could take?

TIA.

ezyTrader,

This thread.

The 45 day rule only applies to the franking credits on dividends if you get more than $5000 of franking credits during the year. It only relates to dividends.

how can I prove to ATO, that I intend to hold the original lots of shares, and sell the latter ones (higher priced) as part of the trading plan?

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I would say just by keeping clear records of your trades and making sure the profits/losses recorded are correct for the nominated shares you want to sell. The CGT guide says the ATO will accept your selection, so as long as you have the proper records, I wouldn't think there'd be a problem. However, this is just my opinion, so seek your own professional advice.

One thing to be wary of if you're holding investment shares and also trading for shorter-term gains is the possibility that you may get classified as a trading business if you trade too much, in which case your investment shares will also lose their capital gain status. How much is too much is not specified, and the ATO looks at other things as well as just number of trades. In theory it's intention that determines this, but in practice I think it comes down to a number of more quantifiable factors. If you want to trade a lot, you may want to consider doing it in a different entity (company or trust) to avoid losing the CG status of your investment shares. Something to check with your accountant if you are concerned about this.

Cheers,
GP

One thing to be wary of if you're holding investment shares and also trading for shorter-term gains is the possibility that you may get classified as a trading business if you trade too much, in which case your investment shares will also lose their capital gain status.

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PG, are you saying it's bad to lose CG?

If you want to trade a lot, you may want to consider doing it in a different entity (company or trust) to avoid losing the CG status of your investment shares.

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That's my intention - to trade using a company trust.

ezyTrader said:

are you saying it's bad to lose CG?

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If you hold the shares for more than 12 months then you will be entitled to the 50% CGT discount (as long as the investments are not in a company structure). This means a much lower tax rate than for normal income.

If you only ever hold for less than 12 months then it wouldn't make much difference.

GP

Thanks for that, PG.

Well, at the moment, I don't think it'll worry me too much.
Would you know of any easy reading material (apart from ATO website) that I can read up on for share trading and tax related issues?