The Elephant in the room - Taxation

[Belli]

ETF trick: I am only going to be buying quality ETFs that pay distributions (just like dividends for stocks but for funds they are called distributions) that I am happy to hold long term. Basically, buy when I have some excess cash or DCA with small sums and just hold with Warren Buffet's investment horizon. Do you guys see the trick, I hope you do. In case you missed it, let me spell it out:

When you do your taxes there are Capital Gains Tax events that you have to declare in that FY. A CGT event only occurs when you sell an asset, in my case those ETFs that I bought Low and sold High. But any ETFs that I purchase going forward is not going to be sold, hence no CGT event and therefore I won't get bent over. Distributions will be subject to tax, but some ETFs will have franking, so I will lean towards those.

ETFs can have Capital Gains whether you sell or not.

Snap shot of the components to include in a personal tax return (VAS 2021 annual tax statement.). The internal CG was quite high that year.



Same with VGS where there was some CG as well.

You can check the distribution tax components for each distribution by searching the ASX announcements. Here is the link to the distribution tax estimates for VAS for the October 2022 distribution.

https://cdn-api.markitdigital.com/a...ess_token=83ff96335c2d45a094df02a206a39ff4for

Also, some I understand (I think it was VDHG but I cannot be sure) can have large CG due to rebalancing or a whale cashing out of the wholesale funds. I believe there was a lot of hand wringing back at one stage when the yearly distribution was quite high.

 

[qldfrog]

ETFs can have Capital Gains whether you sell or not.

Snap shot of the components to include in a personal tax return (VAS 2021 annual tax statement.). The internal CG was quite high that year.

View attachment 151166

Same with VGS where there was some CG as well.

You can check the distribution tax components for each distribution by searching the ASX announcements. Here is the link to the distribution tax estimates for VAS for the October 2022 distribution.

https://cdn-api.markitdigital.com/a...ess_token=83ff96335c2d45a094df02a206a39ff4for

Also, some I understand (I think it was VDHG but I cannot be sure) can have large CG due to rebalancing or a whale cashing out of the wholesale funds. I believe there was a lot of hand wringing back at one stage when the yearly distribution was quite high.

Indeed ETFs remove some but not all the cgt taxes and remove you power of decision.it is a nightmare to compute these CGT properly, moreover figures are only provided late if you do your own individual returns
direct shares give you more control, that is sure..but has own issues

 

[mullokintyre]

All the big macro guys live in the Carribbean. Must be something in that.

Its the weather.
And a lot of good looking babes in Bikinis.
mick

 

[Belli]

Indeed ETFs remove some but not all the cgt taxes and remove you power of decision.it is a nightmare to compute these CGT properly, moreover figures are only provided late if you do your own individual returns
direct shares give you more control, that is sure..but has own issues

Many aspects of ETFs are outside of one's control. One example is STW's current distribution increased by 24.1% compared with the pcp, yet VAS's increase is 14.5% for the same period.

 

[Value Collector]

ETFs can have Capital Gains whether you sell or not.

Snap shot of the components to include in a personal tax return (VAS 2021 annual tax statement.). The internal CG was quite high that year.

View attachment 151166

Same with VGS where there was some CG as well.

You can check the distribution tax components for each distribution by searching the ASX announcements. Here is the link to the distribution tax estimates for VAS for the October 2022 distribution.

https://cdn-api.markitdigital.com/a...ess_token=83ff96335c2d45a094df02a206a39ff4for

Also, some I understand (I think it was VDHG but I cannot be sure) can have large CG due to rebalancing or a whale cashing out of the wholesale funds. I believe there was a lot of hand wringing back at one stage when the yearly distribution was quite high.

I think Aus_trader is referring to the capital gains he would be in control of by trading the etf (not what is happening outside his control inside the fund itself) and whether they are short term and subject to the full taxation or longer term and subject to the discounted taxation.

What capital gains tax events happen inside the company or fund outside of his control are going to happen either way whether he is trading the stock or investing longer term, and doesn’t really affect his strategy.

After all any company you invest in can have a CGT event inside the company that it will have to pay tax on at the full company rate, the ETF’s just have the benefit of passing them along to you and taxing them on your tax return where there is a chance for you to get the discount.

 

[aus_trader]

I think Aus_trader is referring to the capital gains he would be in control of by trading the etf (not what is happening outside his control inside the fund itself) and whether they are short term and subject to the full taxation or longer term and subject to the discounted taxation.

What capital gains tax events happen inside the company or fund outside of his control are going to happen either way whether he is trading the stock or investing longer term, and doesn’t really affect his strategy.

After all any company you invest in can have a CGT event inside the company that it will have to pay tax on at the full company rate, the ETF’s just have the benefit of passing them along to you and taxing them on your tax return where there is a chance for you to get the discount.

Spot on @Value Collector, I am only referring to the CGT payable on short-term trading which takes away all the hard work of trying to make a buck from speculating on the ETF price movement via buying and selling. I have come to the conclusion that for ETFs the effort of timing the market wasn't worth it when you have to pay hefty CGT at the end of the FY.

I would use ETFs as a long-term investment of course going forward. It's a great way to diversify your portfolio and I think they carry less risk than buying individual companies as ETFs usually consist of a basket of assets such ASX300 in the case of VAS or ASX200 in the case of STW.

 

[aus_trader]

don't totally forget your trading skills , even if trying to switch to long term , sometimes it is compelling to add to a position , and sometimes equally wise to exit .

most nations are moving towards tax-addiction , try to find a nation that balances it's budget more often than not , most of the EU is a basket-case ( including the UK ) japan might be cheap now ( tax-wise ) but the piper must be paid eventually

good luck

( folks love to kill the golden goose , so be watchful )

Of course, @divs4ever and thank you for your encouragement. I will be continuing with trading activities with individual stocks in the Speculative Stock Portfolio into the new year of 2023 and beyond...

However, with ETFs, I find it's easier and more tax effective to hold long term and not trade in and out and pay higher short-term Capital Gains Tax.

 

[divs4ever]

Of course, @divs4ever and thank you for your encouragement. I will be continuing with trading activities with individual stocks in the Speculative Stock Portfolio into the new year of 2023 and beyond...

However, with ETFs, I find it's easier and more tax effective to hold long term and not trade in and out and pay higher short-term Capital Gains Tax.

but don't forget to still watch the ETFs sometimes those PDS changes make them less attractive , and sometimes changing horses (ETFs ) makes sense as well

also index ETFs have some interesting momentary entry points ( say when MQG , CBA or BHP go ex-div. or ex-distribution ) ( wink )

 

[Belli]

I think Aus_trader is referring to the capital gains he would be in control of by trading the etf (not what is happening outside his control inside the fund itself) and whether they are short term and subject to the full taxation or longer term and subject to the discounted taxation.

I agree. I had no doubts @aus_trader was aware of that. I was thinking, but didn't clarify unfortunately, of a newbie reading the posts and not being aware of nuances with ETFs so that is why I posted.

 

[Belli]

also index ETFs have some interesting momentary entry points ( say when MQG , CBA or BHP go ex-div. or ex-distribution )

Provide the data to actually support that statement.

 

[divs4ever]

Provide the data to actually support that statement.

no analytical skills yourself ???

pick a major component that goes ex- div. and the index will drop proportionately ( as your 'component ' is probably less than 5% of the ETF's NTA )

so ( say) , MQG dropped $3 going ex-div. the target ETF normally drops proportionately , BUT due to the delay in the div. calculation for the ETF you are still entitled to a share of that div. , now this difference doesn't last very long until the ETF price stabilizes

and sure the difference is only cents ( saved ) and you need to be watching ( with no guarantee you will get your target )

you could always test the theory on an XFJ focused ETF as the large banks are the elephant's share of the basket

QFN ( i hold ) is used as an example , but other close rivals should also be useful to test the theory

CODE	COMPANY	ASSET
CBA	Commonwealth Bank of Australia	29.65%
NAB	National Australia Bank Ltd	16.14%
WBC	Westpac Banking Corp	13.47%
ANZ	Australia and New Zealand Banking Group Ltd	11.97%
MQG	Macquarie Group Ltd	10.68%

Top 10 Holdings

CODE	COMPANY	ASSET
QBE	QBE Insurance Group Ltd	3.08%
SUN	Suncorp Group Ltd	2.44%
ASX	ASX Ltd	2.18%
IAG	Insurance Australia Group Ltd	1.91%
MPL	Medibank Private Ltd	1.30%

Frequency Semi-Annually

PS this would probably test OK on resource stock focused ETFs as well

cheers

 

[Belli]

no analytical skills yourself ???

Not the issue.

You made the statement so you provide the data to support it. And by data I mean actual correlation and not guesswork.

 

[divs4ever]

Not the issue.

You made the statement so you provide the data to support it. And by data I mean actual correlation and not guesswork.

well apart from the fact it MIGHT constitute financial advice

and each investor might apply it differently

QFN

trade history

11/11/2022	31.000	31.100	30.900	30.980	0.680	2.24	56,699
10/11/2022	30.660	30.660	30.270	30.300	-0.300	-0.98	15,158
09/11/2022	30.520	30.740	30.490	30.600	0.010	0.03	9,789
08/11/2022	30.450	30.640	30.440	30.590	0.350	1.16	3,494
07/11/2022	30.730	30.860	30.180	30.240	-0.390	-1.27	16,216
04/11/2022	30.400	30.630	30.340	30.630	0.000	0.00	7,003
03/11/2022	30.800	30.800	30.600	30.630	-0.540	-1.73	14,287

MQG went ex-div. ( paying $3 )
Ex-Dividend Date 07 Nov 2022


MQG trade history

14/11/2022	180.090	180.295	177.500	177.720	-1.580	-0.88	994,619
11/11/2022	177.000	180.360	176.500	179.300	9.510	5.60	1,848,512
10/11/2022	170.500	171.390	169.150	169.790	-1.660	-0.97	650,681
09/11/2022	170.000	173.280	169.870	171.450	1.710	1.01	708,558
08/11/2022	169.000	170.290	168.440	169.740	1.540	0.92	708,400
07/11/2022	168.140	169.160	166.900	168.200	-2.170	-1.27	771,210
04/11/2022	164.960	170.370	164.100	170.370	3.920	2.36	1,535,185
03/11/2022	165.820	167.740	165.400	166.450	-2.430	-1.44	1,701,256

could be coincidence , but those who find it interesting are liable to investigate more deeply


just remember it is liable to be a passing opportunity ( for example QBE ex-div. share prices are very unreliable )

 

[WayneC74]

in regards to cgt if you sell your shares with in the year you brught tham you would pay the full cgt but if you sell tham say 2 or 4 you would pay less remembver you pay less cgy the longer you hold your shares

copy and past from https://moneysmart.gov.au/how-to-in...e held the,gains tax on different investments. How investment income is taxed​

You need to include investment income in your tax return. This includes what you earn in:

• interest
• dividends
• rent
• managed funds distributions
• capital gains from property, shares and cryptocurrencies

You pay tax on investment income at your marginal tax rate


You're allowed tax deductions for the cost of buying, managing and selling an investment. But there are rules around what you can and can't claim as a tax deduction. See the Australian Taxation Office (ATO)'s investment income deductions.

Investing and tax can be complex. See choosing an accountant for where to go for help.

Making capital gains or losses​

Capital gains​

If you sell an investment for more than the cost to acquire it, you make a capital gain. You need to include all capital gains in your tax return in the year you sell the investment. Capital gains are taxed at your marginal rate.

If you've held the investment for more than 12 months, you're only taxed on half of the capital gain. This is known as the capital gains tax (CGT) discount.

The ATO has information to help you work out your capital gains tax on different investments.

Capital losses​

If you sell an investment for less than the cost to acquire it, you make a capital loss.

You can use a capital loss to:

• reduce capital gains made in the year the loss occurs, or
• carry forward the loss to offset future capital gains

• CASE Study

Savannah makes use of a capital loss
Savannah bought $2,000 worth of shares (50 shares at $40 per share) in a large mining company.
After 18 months she sold the shares. They had fallen in price to $20 per share. She made a capital loss of $1,000.
Savannah also made a profit of $1,500 from selling others shares she held. She had held these shares for five years.
Savannah can deduct the $1,000 she made a loss on from the $1,500 capital gain. This leaves her with a profit of $500. As Savannah held the shares for more than 12 months, she only includes half the capital gain in her tax return. She'll pay tax on this $250 at her marginal tax rate.

Positive versus negative gearing​

Positive gearing​

Positive gearing is where you borrow money to invest and the income from the investment (for example, rent or dividends) is more than the cost of the investment (interest and other expenses).

If you're positively geared, you'll have extra money coming in. But you'll also have to pay tax on this income at tax time.

Negative gearing​

Negative gearing is where you borrow to invest and the investment income is less than the cost of the investment.

Investors negatively gear as they can generally claim a tax deduction for the investment loss. The aim is for the capital growth to offset the loss in earlier years.

If you're making an investment loss, it is still costing you money. You'll need to have cash from other sources, like your salary, to cover interest and expenses.

Tax-effective investments​

A tax-effective investment is one where the tax on your investment income is less than your marginal tax rate.

Choose investments based on your financial goals, risks you're comfortable with and expected returns. Tax benefits should be a secondary consideration.

Superannuation​

Super is a tax-effective investment and one of the best ways to save for retirement. This is because the government provides tax incentives to save through super. These include:

• A tax rate of 15% on employer super contributions and salary sacrifice
  
  contributions, if they're below the $27,500 cap.
• A maximum tax rate of 15% on investment earnings in super and 10% for capital gains.
• No tax on withdrawals from super for most people over age 60.
• Tax-free investment earnings when you start a super pension.

See Tax and super for more information.

Insurance bonds​

Insurance bonds are investments offered by insurance companies. They can be tax effective if you're planning to invest for 10 years and follow certain rules.

All earnings in an investment bond are taxed at the corporate tax rate of 30%. If no withdrawals are made in the first 10 years, no further tax is payable. They can be tax effective for investors with a marginal tax rate higher than 30%.

Beware tax-driven investments
Tax-driven schemes offer tax deductions now for investing in assets that may provide income in the future. These schemes can be high risk and some are scams. Check the ATO page investigate before you invest for how to spot a dodgy tax scheme. Or get professional advice from an accountant.

Investing and your tax return​

Keeping good records will help you at tax time to:

• Report investment income.
• Claim all tax deductions you're entitled to.

It will also help you calculate any capital gains or losses when you sell an investment.

For all investments such as shares, property and cryptocurrencies you need to keep records to show:

• How much you paid for it — contracts for purchase of the asset and receipts.
• How much you sold it for — contracts for the sale of an asset and receipts.
• Income you get from the investment — keep all records of income payments such as distribution statements, rental payment receipts and dividend statements.
• Expenses paid while owning the investment — receipts for payments made to manage, maintain or improve the investment.

You'll need to keep records for five years after you included the income and capital gain or loss in your tax return.

 

[sptrawler]

Tax is certainly on the Government agenda, which is great IMO.

Australians recouped a record $9.9 billion in work deductions

The Albanese government has started a debate about tax concessions around superannuation. But there are more than 300 in our tax system.

www.smh.com.au

Australians are claiming billions of dollars worth of tax deductions for work-related expenses and managing their tax affairs as the concessions built into the tax system weigh on the amount of revenue flowing into federal coffers.

A breakdown of the latest tax expenditure report, used this week to justify the federal government’s planned changes to the tax on superannuation balances of more than $3 million, also show forgone revenue on everything from childcare to business research and development is growing faster than parts of the super system.
Outside superannuation and capital gains, the largest cost to the budget is work-related tax deductions, which are expected this year to reach a record $9.9 billion, a jump of almost 24 per cent since 2018-19. Next financial year, they are tipped to increase to $10.4 billion.
The tax concession report, first introduced by Paul Keating in 1986, attempts to track cost of forgone revenue caused by different tax rates or concessions across the entire tax system.

Last Tuesday’s report identified capital gains tax concessions and discounts on the family home, other assets and through trusts as the single largest tax expenditure in Australia at almost $72 billion, obliging Prime Minister Anthony Albanese to definitively rule out taxing the family home as “a bad idea”.
The surge in house values and share prices over the past four years have driven up the value of the concessional tax treatment of capital gains, but higher interest rates and a slowing economy are expected to reduce these concessions over the next three years.
The second largest are the concessions on employer superannuation contributions and the lower tax rate on super earnings, which amounted to $50 billion.

While capital gains and superannuation are the two largest concessions, there are now more than 300 of which some are almost impossible to measure because they are so small they are difficult to estimate.

In 2019-20, 86 per cent of the total tax reduction via work-related deductions went to people with an above median taxable income, with more than one-quarter going to people in the top 10 per cent of income earners.
Men, who accounted for 65 per cent of reductions, received on average a $1050 reduction. About 4.7 million women received an average tax reduction of $600.
For the first time, the report notes about 6.6 million people claimed $4 billion for the cost of managing their tax affairs in 2019-20. This reduced total tax payments by $1.4 billion.

This year, the forgone tax is estimated to cost the budget $1.6 billion. Labor went to the 2019 federal election with a now-abandoned proposal to cap the amount a person could claim for managing their tax affairs to $3000.
The fastest growing expense is the exemption for NDIS recipients from forms of income tax. After growing by almost 59 per cent since 2018-19 to $8.1 billion, this is tipped to climb another 19.2 per cent to $12 billion by 2025-26.
Over the next four years, four of the five fastest growing tax expenditures are expected to be sectors that are exempt or zero-rated for the GST – childcare services, residential care, financial supplies and health services.
The exemptions, put in place as part of the original deal struck by John Howard with the Australian Democrats in 1999 to get Senate approval for the GST, are expected to be worth $31 billion this year.
Government debt reached $901.3 billion on Friday, the record under the Albanese government, but was exceeded under the Morrison government in early 2022. The Albanese government in October forecast debt to reach a record $1 trillion by mid-2024.

Chalmers said it was important to recognise that the “right path is not always the path of least political resistance”.

 

[wayneL]

Tax is certainly on the Government agenda, which is great IMO.

Australians recouped a record $9.9 billion in work deductions

The Albanese government has started a debate about tax concessions around superannuation. But there are more than 300 in our tax system.

www.smh.com.au

Australians are claiming billions of dollars worth of tax deductions for work-related expenses and managing their tax affairs as the concessions built into the tax system weigh on the amount of revenue flowing into federal coffers.

A breakdown of the latest tax expenditure report, used this week to justify the federal government’s planned changes to the tax on superannuation balances of more than $3 million, also show forgone revenue on everything from childcare to business research and development is growing faster than parts of the super system.
Outside superannuation and capital gains, the largest cost to the budget is work-related tax deductions, which are expected this year to reach a record $9.9 billion, a jump of almost 24 per cent since 2018-19. Next financial year, they are tipped to increase to $10.4 billion.
The tax concession report, first introduced by Paul Keating in 1986, attempts to track cost of forgone revenue caused by different tax rates or concessions across the entire tax system.

Last Tuesday’s report identified capital gains tax concessions and discounts on the family home, other assets and through trusts as the single largest tax expenditure in Australia at almost $72 billion, obliging Prime Minister Anthony Albanese to definitively rule out taxing the family home as “a bad idea”.
The surge in house values and share prices over the past four years have driven up the value of the concessional tax treatment of capital gains, but higher interest rates and a slowing economy are expected to reduce these concessions over the next three years.
The second largest are the concessions on employer superannuation contributions and the lower tax rate on super earnings, which amounted to $50 billion.

While capital gains and superannuation are the two largest concessions, there are now more than 300 of which some are almost impossible to measure because they are so small they are difficult to estimate.

In 2019-20, 86 per cent of the total tax reduction via work-related deductions went to people with an above median taxable income, with more than one-quarter going to people in the top 10 per cent of income earners.
Men, who accounted for 65 per cent of reductions, received on average a $1050 reduction. About 4.7 million women received an average tax reduction of $600.
For the first time, the report notes about 6.6 million people claimed $4 billion for the cost of managing their tax affairs in 2019-20. This reduced total tax payments by $1.4 billion.

This year, the forgone tax is estimated to cost the budget $1.6 billion. Labor went to the 2019 federal election with a now-abandoned proposal to cap the amount a person could claim for managing their tax affairs to $3000.
The fastest growing expense is the exemption for NDIS recipients from forms of income tax. After growing by almost 59 per cent since 2018-19 to $8.1 billion, this is tipped to climb another 19.2 per cent to $12 billion by 2025-26.
Over the next four years, four of the five fastest growing tax expenditures are expected to be sectors that are exempt or zero-rated for the GST – childcare services, residential care, financial supplies and health services.
The exemptions, put in place as part of the original deal struck by John Howard with the Australian Democrats in 1999 to get Senate approval for the GST, are expected to be worth $31 billion this year.
Government debt reached $901.3 billion on Friday, the record under the Albanese government, but was exceeded under the Morrison government in early 2022. The Albanese government in October forecast debt to reach a record $1 trillion by mid-2024.

Chalmers said it was important to recognise that the “right path is not always the path of least political resistance”.

I reckon reducing stupid expenditure and pork barreling might be a better agenda item.

But while we're at taxation maybe they should look at the differentiation between public sector and private sector superannuation contributions and how that affects the public purse, both by the difference in contribution and taxation... Maybe even the benefits to ex politicians?

But let's face it, the rich will be able to rearrange their affairs, whereas the usual easy target, AKA the middle class, will be forced to take it without lube... again.

 

[MovingAverage]

I reckon reducing stupid expenditure and pork barreling might be a better agenda item.

But while we're at taxation maybe they should look at the differentiation between public sector and private sector superannuation contributions and how that affects the public purse, both by the difference in contribution and taxation... Maybe even the benefits to ex politicians?

But let's face it, the rich will be able to rearrange their affairs, whereas the usual easy target, AKA the middle class, will be forced to take it without lube... again.

If the current bunch of bozos running this country are serious then as you point out they should start by looking at the supersized super contributions the government gives public servants--now that is a hard cost to the tax payer not a concession. Public servants get what 15% when most of the private sector only gets 10.5%. How about government chops its generous government 15% and bring it into line with the private sector. That will save the tax payer a lot of money.

 

[Sean K]

I reckon reducing stupid expenditure and pork barreling might be a better agenda item.

But while we're at taxation maybe they should look at the differentiation between public sector and private sector superannuation contributions and how that affects the public purse, both by the difference in contribution and taxation... Maybe even the benefits to ex politicians?

But let's face it, the rich will be able to rearrange their affairs, whereas the usual easy target, AKA the middle class, will be forced to take it without lube... again.

This attack of the 'rich' folk's super must be applied to the pollies as well. It's likely to get reversed anyway I suppose once Liberals get back in, which is increasingly likely with Labor resorting to type.

What are the odds that the Snake Chalmer floats a death tax during this term?

 

[MovingAverage]

This attack of the 'rich' folk's super must be applied to the pollies as well. It's likely to get reversed anyway I suppose once Liberals get back in, which is increasingly likely with Labor resorting to type.

What are the odds that the Snake Chalmer floats a death tax during this term?

100%...death tax and some kind of tax on the family home.

 

[Belli]

This Elephant just got richer but I don't know why it happened.

Went into my account to pay a bill and noticed a deposit from the ATO dated today. It wasn't a large amount. The first perplexing issue is, apart from declaring interest on the account, I haven't provided the ATO with those account details for any other purpose. The second is what is it for? As I do not deal with the ATO except via an accountancy firm and as I don't have a MyGov account for anything not even Medicare, I decided to occupy the accountant's time and asked them to investigate.