Newbie Q: Tax on free-carried position?

[dumadiscount]

Sorry, hope this makes sense:

- I invest $10k in XYZ and it doubles to $20k in 6 months.

If I sell of half ($10k) of my holding in XYZ immediately am I correct to assume that:

- I pay no tax on my initial capital of $10k which is sold off 6 months before CGT discount date.

- If I wait for 12 months from XYZ purchase date to sell the rest of "free-carried" holding, I will get CGT discount on the profitable part of my trade?

 

[burglar]

Sorry, hope this makes sense:

- I invest $10k in XYZ and it doubles to $20k in 6 months.

If I sell of half ($10k) of my holding in XYZ immediately am I correct to assume that:

- I pay no tax on my initial capital of $10k which is sold off 6 months before CGT discount date.

- If I wait for 12 months from XYZ purchase date to sell the rest of "free-carried" holding, I will get CGT discount on the profitable part of my trade?

That is not correct, suggest you google ATO capital gains or ring ATO!
They have nice helpful people there!

 

[choice1]

http://www.ato.gov.au/individuals/content.asp?doc=/content/00237980.htm

That's the ATO guide on capital gains for personal investors

Quick answer for you (it is clearer if you use numbers of shares).

You by 1000 shares for $10 each. ($10,000)
Share price rises to $20 ($20,000 holding, increase of $10,000)
You decide to sell half your holding, which is 500 shares at $20 per share.

This would leave you in a situation where your proceeds would be $10,000 (500x$20) and your cost base (excluding brokerage etc) would be $5,000 (500*$10) therefore your capital gain would be $5,000.

CGT discount applies after holding for 12 months and can be used to half your capital gain. In this case your gain would be $2,500 if you sold after a year.

 

[burglar]

Sorry, hope this makes sense:

- I invest $10k in XYZ and it doubles to $20k in 6 months.

If I sell of half ($10k) of my holding in XYZ immediately am I correct to assume that:

- I pay no tax on my initial capital of $10k which is sold off 6 months before CGT discount date.

- If I wait for 12 months from XYZ purchase date to sell the rest of "free-carried" holding, I will get CGT discount on the profitable part of my trade?

Will you use a tax accountant or will you do your own tax return?
Important that you know the nuances if you do your own.
No need to ask here, if you need to get it exactly right.

 

[dumadiscount]

Thanks for clarifying, looks like I'll just use a tax accountant.

I'm sitting on pretty decent gain in the last 6 months and was hoping to sell my initial stake and free-carry the rest if it was tax-free to do so. But looks like I'll just hold the lot for now!

 

[burglar]

Thanks for clarifying, looks like I'll just use a tax accountant.

I'm sitting on pretty decent gain in the last 6 months and was hoping to sell my initial stake and free-carry the rest if it was tax-free to do so. But looks like I'll just hold the lot for now!

Don't be despondent! I did not mean to make it look difficult!

Firstly, you don't pay CGT until next financial year!
Secondly, the capital gain adds to your taxable income.
It's therefore hugely dependent on your level of income (I'm not prying)

If you can easily manage to do your Tax Return without a CGT event, I would suggest that you could just as easily do it with a CGT event. But there are nuances which the ATO is very happy to clarify for you.

Yes. That means homework!!

 

[burglar]

... But looks like I'll just hold the lot for now!

If you sell 60% or $12,000

Capital Gain = $6,000 (less pro rata brokerage and other costs)
Taxed at top rate 45% = $2,700 (not payable till next financial year!)
You get approximately $9,300 in your pocket.
Plus 40% almost free-carried

If you think your investment has been pushed above "fair value", this may be a good strategy.

 

[pixel]

Thanks for clarifying, looks like I'll just use a tax accountant.

I'm sitting on pretty decent gain in the last 6 months and was hoping to sell my initial stake and free-carry the rest if it was tax-free to do so. But looks like I'll just hold the lot for now!

One of the least intelligent ways to determine when to sell is selling based on tax considerations, especially when you have to consider where the share price might be six months from now.

Let's say you're sitting on a $10,000 profit, of which you have to pay tax at a marginal rate of 30%. Still leaves $7,000 in your pocket.
Now you decide against selling because in six months' time, your CGT will reduce to 15%.

What are the chances of the share price falling back?
If it drops to a level where your profit is only $8,000, 15% tax leaves you $6,800.

So, the intelligent question to ask is: How likely is the current, rising trend going to continue? Has it hit resistance at the current High? Will it drop back and allow me to buy back more at a lower price?

Technical Analysis (and experience) will provide a rational answer to those questions. And when the rational answer is "Sell NOW", I sell NOW.
And don't worry about taxes: remember, you only pay them from Total Profits.

If the amount or rate of tax does become a concern, it may be a good idea to start selling a few of those dogs that just about everybody has in the bottom drawer and should have sold years ago...

 

[burglar]

... "free-carried" ...

I googled "zero cost averaging" a term I learnt here at ASF from nunthewiser (sic)

I read this one:
http://thepatternsite.com/ZeroCostAverage.html

I note he has not allowed for Brokerage OR CGT ... probably a citizen of the US
Nevertheless, it's a legit form of trading!

 

[dumadiscount]

Thanks both for your great advice!

Here's my actual situation: I've been accumulating SDL over the last 7 months with an average buy of 27c so with it now being around 51c it's close to double.

However, outside of my managed fund it's the only direct shares I hold and preferably I'd like to diversify into a second stock.

I'm pretty confident of the prospects of SDL in the short term, my personal target is 80c by end of year. However, at the same time SDL is still a stock with some level of risk and it's probably not the best idea to have "all my eggs in one basket" as they say.

That's why I started looking at the "free-carry" or "zero cost averaging" (thanks burglar) option!

I'm still undecided... on one hand I'm confident in SDL continuing to make gains in the short to medium term, on the other hand I'm thinking diversify!!!

 

[So_Cynical]

Will you use a tax accountant or will you do your own tax return?
Important that you know the nuances if you do your own.
No need to ask here, if you need to get it exactly right.

Its not rocket science...i mean if anyone cant get there head around the simplicity's of CGT then they really should stick to savings accounts as an investment vehicle.

 

[burglar]

Its not rocket science...i mean if anyone cant get there head around the simplicity's of CGT then they really should stick to savings accounts as an investment vehicle.

I never said it was rocket science, I said there are nuances about which the ATO is a stickler. And posters on a forum, self included, are not gonna get it all correct for sumwun else about whom they know nothing.

Sorry if I sound rude!

 

[burglar]

Thanks both for your great advice!

Here's my actual situation: I've been accumulating SDL over the last 7 months with an average buy of 27c so with it now being around 51c it's close to double. ...

Yesterday, I was reading a glossy mag re SDL (may have been "Paydirt") It was a lovely report!

If it's half true, you're on a good thing!

Good luck with you're dilemma.

P.S. I see that some of your SDL will be held for one year, sooner/earlier than the rest.
If you sell the most recently acquired, I would assume :

1.) They are the most expensive, and therefore have the least net gain.

2.) They have a long wait to get the discount anyway.

If/when you sell a part of the holding, the ATO allows you to nominate which part you are selling.
Unless you expect wholesale changes in your taxable income you could nominate/choose the most recently acquired.
Like I said, there are nuances! But it's not rocket science.

 

[burglar]

... it's probably not the best idea to have "all my eggs in one basket" as they say.

Unless SDL goes harder than your other choices!!

"the wise man saith, `Put all your eggs in the one basket and--watch that basket!' "

SOURCE:
http://herbison.com/herbison/broken_eggs.html

 

[dumadiscount]

thanks burglar, not a bad idea... i actually have one small parcel I bought at 57c recently so I could actually sell it for a small loss... and while I have other stocks on my radar I dont understand them as well as SDL which I have been following for a few years. Think I'll just stay with what I know!

 

[burglar]

thanks burglar, not a bad idea... i actually have one small parcel I bought at 57c recently so I could actually sell it for a small loss...

You cannot offset a capital loss against your taxable income.

But there are two things you can do.

1. You can aggregate your gains and your losses.
Report the net loss and accumulated loss on the Tax Supplement.
In future years you can offset gains against this accumulated loss.
(some say this is incorrect, that is why I recommend the ATO)

2. You can sell enough gainers to offset the losers so you have a zero net gain.

Your buying costs (brokerage, bank interest etc.) and selling costs will need to be calculated on a pro rata basis if you split any of the parcels you bought.

I hope this was helpful, but probably clear as mud!?

Overruling all of this is Pixel's wonderful advice regarding rational reason to sell