How do investors here deal with tax issues?

[ReXXar]

Hi I was just wondering how do people deal with tax on profits when they sell shares??

I began buying stocks from last September and I now want to rotate into cheaper stocks, but I'll incur a huge tax bill if I sell (more than 35%, tax is more than my day job wages for the whole year), so I'm trying to hold for next two months until September to cut the capital gains tax in half.

But this is stupid way to go about it, holding on to shares longer than necessary to minimise tax is never good option for an active trader. So what do people do?? Is the best option to set up a company so all profit will be taxed at flat 30% or is there another more tax effective way?

I used to trade futures and they were classified as business income under sole trader as I trade a lot everyday, now I trade stocks maybe once every month or two, is that still classified as business income or capital gain?

Many thanks in advance for any advice.

 

[traderxxx]

you could set up a smsf and pay 15% tax.

 

[ReXXar]

you could set up a smsf and pay 15% tax.

Thanks traderxxx for your reply. I've looked into that, but from what I understand that's best for people close to retirement so you can access the funds. 99% of my cash is tied up in stocks and unfortunately I cannot wait 35 years to access the funds.

 

[Value Collector]

so I'm trying to hold for next two months until September to cut the capital gains tax in half.

But this is stupid way to go about it, holding on to shares longer than necessary to minimise tax is never good option for an active trader.

If holding them for an extra 2 months is going to generate an extra 17.5% after tax return, how is that a stupid thing?

Hi I was just wondering how do people deal with tax on profits when they sell shares??

I just pay what ever tax I owe,

the only real thing I try to do is manage sales in a way that spreads the capital gain over different financial years so I don't load up one year to much, and take advantage of the 50% capital gains discount.

I began buying stocks from last September and I now want to rotate into cheaper stocks, but I'll incur a huge tax bill if I sell (more than 35%, tax is more than my day job wages for the whole year),

You really have to decide whether the new investments are so much better than the old ones that paying the Tax is worth it.

If you can find a high quality company that is going to continue to grow over many years, it can be better to hold that company and allow the profits the compound over the years without subjecting it to tax.

For example, if a stock is growing at 10% on average every year, and one investor never sells, while another investor sells and repurchases each year paying capital gains tax, the one that never sold until say year 20 will have a lot more stock, because his investment compounded at 10% without having to pay tax for 20 years.

So what do people do?? Is the best option to set up a company so all profit will be taxed at flat 30% or is there another more tax effective way?

Probably a family trust, So you can distribute profits to yourself, your spouse and even back to a company in the most tax effective way at the time, this allows you to take advantage of the capital gains discount when you can, the lower tax brackets of family, and also limits tax to the 30% of a company.

 

[ReXXar]

If holding them for an extra 2 months is going to generate an extra 17.5% after tax return, how is that a stupid thing?



I just pay what ever tax I owe,

the only real thing I try to do is manage sales in a way that spreads the capital gain over different financial years so I don't load up one year to much, and take advantage of the 50% capital gains discount.



You really have to decide whether the new investments are so much better than the old ones that paying the Tax is worth it.

If you can find a high quality company that is going to continue to grow over many years, it can be better to hold that company and allow the profits the compound over the years without subjecting it to tax.

For example, if a stock is growing at 10% on average every year, and one investor never sells, while another investor sells and repurchases each year paying capital gains tax, the one that never sold until say year 20 will have a lot more stock, because his investment compounded at 10% without having to pay tax for 20 years.



Probably a family trust, So you can distribute profits to yourself, your spouse and even back to a company in the most tax effective way at the time, this allows you to take advantage of the capital gains discount when you can, the lower tax brackets of family, and also limits tax to the 30% of a company.

Thanks, the family trust is good idea, definitely should do it for people who have family, since I have none that won't work. I guess I'll just have to try to spread it out like you do, on a side note Australian tax is ridiculously high, the US tax capital gains at 15%, its very favorable to investors, while in Australia its classified as personal income which can reach 45%! I been living overseas so long maybe I should just relocate permanently..

Regarding selling, well if the company's fundamentals change tomorrow then we must act promptly regardless of tax or transaction costs, I agree with you though, only two months left its not worth creating an ATO bear market. Still, it makes uncomfortable tax considerations are influencing my investment decisions and holding me hostage.

 

[Value Collector]

Thanks, the family trust is good idea, definitely should do it for people who have family, since I have none that won't work. I guess I'll just have to try to spread it out like you do, on a side note Australian tax is ridiculously high, the US tax capital gains at 15%, its very favorable to investors, while in Australia its classified as personal income which can reach 45%! I been living overseas so long maybe I should just relocate permanently..

Regarding selling, well if the company's fundamentals change tomorrow then we must act promptly regardless of tax or transaction costs, I agree with you though, only two months left its not worth creating an ATO bear market. Still, it makes uncomfortable tax considerations are influencing my investment decisions and holding me hostage.

You don't need a family to have a family trust, you can have it set up so the beneficiaries are just you and a company you control, then you just break up the income between yourself and the company in what ever is the most tax effective way at the time, you can change the distribution each year.

You just write in the deed that the trust is for you, your company and any future spouse or children at your discretion, the fact that your family doesn't exist yet doesn't stop you setting up a family trust for yourself in the meantime.

 

[Sir Burr]

been living overseas so long

Could you be a non resident and pay no capital gains?
Although, you would lose that 50% discount

 

[McLovin]

Thanks, the family trust is good idea, definitely should do it for people who have family, since I have none that won't work. I guess I'll just have to try to spread it out like you do, on a side note Australian tax is ridiculously high, the US tax capital gains at 15%, its very favorable to investors, while in Australia its classified as personal income which can reach 45%! I been living overseas so long maybe I should just relocate permanently..

The rate is 45%, but it's only applied to 50% of the gain, so effectively 22.5%. Don't forget state income tax in the US too.

Could you be a non resident and pay no capital gains?
Although, you would lose that 50% discount

Changing your tax residency is a CGT event.

 

[barney]

I used to trade futures and they were classified as business income under sole trader as I trade a lot everyday, now I trade stocks maybe once every month or two, is that still classified as business income or capital gain?

Hi Rex, Everyone's circumstances could be different of course, but if you have been assessed by the tax department in the past as a professional trader due to turnover/profit etc regarding your futures trading....

My assumption is that even though you are currently trading less and on different instruments, you would still be regarded as a professional trader and any income/losses would be treated as per your original setup .... (business income.)

My circumstances are similar to the above and the tax dept. assesses my turnover as it always has ...

A quick call to your accountant should verify. Cheers.

 

[tech/a]

A good accountant will minimise tax

A good trader will need to pay tax

 

[ReXXar]

You don't need a family to have a family trust, you can have it set up so the beneficiaries are just you and a company you control, then you just break up the income between yourself and the company in what ever is the most tax effective way at the time, you can change the distribution each year.

You just write in the deed that the trust is for you, your company and any future spouse or children at your discretion, the fact that your family doesn't exist yet doesn't stop you setting up a family trust for yourself in the meantime.

Interesting, assuming trading profit is your only income, so if your profit is below $87k (<30% tax rate) then you can distribute the entire amount to yourself as personal income, once it goes over $87k (>30% tax rate) then the entire amount can allocate to the company (fixed at 30% tax rate)?

So what if your profit is say $100k, can you allocate say $40k to your personal income (taxed around 11%) and allocate $60k to the company (taxed at 30%)? This way the effective rate becomes around 22% at $100k income, this is possible??

 

[ReXXar]

A good accountant will minimise tax

A good trader will need to pay tax

I'm happy to pay my fair share but in the last 10 years everything has gone out of proportion, all the Government cares about is squeezing money from people.

For example in Sydney I parked somewhere over 5 min, bam $300 fine, I was overseas and my roadworthy certificate expired for two weeks, police pulled me over and hit me $2,000 fine, while I was driving to my old address to pick up the registration letters from RTA, another cop pulled me over and hit with me another $2,000. Sure its my fault, but the penalty is out of proportion to the infringement.

What do we get for our tax dollars?? People say we get free healthcare, those people must've avoided tax and never paid a medicare levy. Other say we get free education, I paid a "voluntary fee" every year when I was in a Government school, and I still carry a massive HECs debt from uni with interest charged higher than cash rate (i.e. Government is making money from this). Everyone who had a property knows how much fees Council collect every year, no wonder my old garbage collector tells me he gets paid $90k a year. The point is, we pay Government handsomely for everything we use, when we retire we all have to rely on our Super to live in dignity. All insurance companies now have a hidden tax for "terrorism" which is passed on to consumers, the public is paying far more tax than we realise.

What do the Government do with our money? Send troops to a landlocked country who never heard of us to appease Uncle Sam in detriment to our national interest?? Why we don't get to decide?? If its a true democracy, why am I forced to vote?? And they're racking up huge debt year on year, why do politicians get higher super than ordinary hardworking Australians?? Is a career made of lying more worthy than an engineer?? Did we Australian citizens get to vote on this on this?? Why they get $400 allowance when they travel and attending useless conferences all year round?? And the Government is racking up massive debt year on year, which by the way, is the biggest risk to our economy in the long-term - debt, its simply a mathematical impossibility that debt-to-GDP can accelerate forever, it is not a matter of if but a matter of when something will blow up. Anyway, sorry for the rant.

 

[tech/a]

Hey I hear you

The taxes my company and I pay

PAYE
Personal Tax
Company tax
GST
Payroll tax
Fringe benefit tax
Luxury vehicle tax
SMSF tax

If you can succeed in any business in this country
And etch out a profit then you deserve to be in the 5 %
That make it.

 

[skc]

Regarding selling, well if the company's fundamentals change tomorrow then we must act promptly regardless of tax or transaction costs, I agree with you though, only two months left its not worth creating an ATO bear market. Still, it makes uncomfortable tax considerations are influencing my investment decisions and holding me hostage.

You will see lots of trading/investment books tell you that you should make decisions independent of tax considerations. These books are wrong. You should make trading/investing decisions on what gives you the best after tax return (adjusted for risk of course).

So the decision you are weighting is whether any gain/loss in your current holding over the additional holding periods, plus any gain/loss in your new investments over the additional holding periods, will offset the additional tax you need to pay. I don't think it's an exercise you can really work out with any precision.

An alternate approach is to get a bridging loan for 2 months so you can acquire the new investments then repay the loan when you sell the old investment after getting your CGT discount. The CGT discount should pay for the loan and some... you are still exposed to capital gain/loss to your old investment of course.

 

[ReXXar]

You will see lots of trading/investment books tell you that you should make decisions independent of tax considerations. These books are wrong. You should make trading/investing decisions on what gives you the best after tax return (adjusted for risk of course).

So the decision you are weighting is whether any gain/loss in your current holding over the additional holding periods, plus any gain/loss in your new investments over the additional holding periods, will offset the additional tax you need to pay. I don't think it's an exercise you can really work out with any precision.

An alternate approach is to get a bridging loan for 2 months so you can acquire the new investments then repay the loan when you sell the old investment after getting your CGT discount. The CGT discount should pay for the loan and some... you are still exposed to capital gain/loss to your old investment of course.

I like your posts, you always write something I haven't thought about.

Regarding taking tax into consideration, if the profits are not classified as capital gain but normal business income, then under a company structure all profits will be taxed at a fixed 30%, so it would seem for an active trader the consideration for tax would no longer matter. If however the profits are classified as capital gain, then from a tax point of view the individual should hold for 12 months or longer to qualify for the 50% discount. Is this right??

(Unless you set up some kind of a trust like Value Investor said above to have the best of both worlds, if possible).

 

[skc]

I like your posts, you always write something I haven't thought about.

Regarding taking tax into consideration, if the profits are not classified as capital gain but normal business income, then under a company structure all profits will be taxed at a fixed 30%, so it would seem for an active trader the consideration for tax would no longer matter. If however the profits are classified as capital gain, then from a tax point of view the individual should hold for 12 months or longer to qualify for the 50% discount. Is this right??

(Unless you set up some kind of a trust like Value Investor said above to have the best of both worlds, if possible).

There are threads here that deal with various structures for investments / trading. Do a search as most issues have been discussed in some detail.

 

[Value Collector]

So what if your profit is say $100k, can you allocate say $40k to your personal income (taxed around 11%) and allocate $60k to the company (taxed at 30%)? This way the effective rate becomes around 22% at $100k income, this is possible??

Yeah. So you utilise the lowers tax rates that apply to you (and other members of the trust) then when those rates go above 30% you put the excess into the company.

 

[ReXXar]

Yeah. So you utilise the lowers tax rates that apply to you (and other members of the trust) then when those rates go above 30% you put the excess into the company.

You're a genius.

 

[Value Collector]

You're a genius.

lol, nope, I just read it in a book.

 

[Klogg]

Yeah. So you utilise the lowers tax rates that apply to you (and other members of the trust) then when those rates go above 30% you put the excess into the company.

This is exactly what I do, great approach.

@ReXXar - also worth keeping in mind (and is a part of what VC said) is if you have anyone who does not declare an income, distribute all the franked dividends to them (my mum doesn't declare an income and is still at least 8 years from any pension/super). She gets $18k of fully franked dividends under her name, resulting in a tax return of the franking credits.

Further, by investing through a discretionary trust, your tax filing/payment dates move out. Basically, you get to hold onto the cash for a while longer. Always a bonus.


"If however the profits are classified as capital gain, then from a tax point of view the individual should hold for 12 months or longer to qualify for the 50% discount. Is this right??"

If you hold assets within a company, you are not eligible for the 50% CGT discount. See the first row of the table in this link:
https://www.ato.gov.au/General/Capi...l-gain-or-loss/Working-out-your-capital-gain/

This also applies if you distribute capital gains from the trust to a company.


Of course, none of this is investment/financial advice, I'm not qualified to give it.
Also, happy to be corrected in any way if I have something wrong in the above.