Thanks for your down-to-earth commentary and advice. Recently you made the following comment, which alarmed me: ‘‘... you could be in trouble with the Tax Office if you sell a parcel of shares and then buy the identical shares back a short time later.’’
I didn’t know that if I sold some shares and paid any applicable CGT, then purchased the same shares again later that I could run into trouble with the Tax Office. Could you please explain?
I was talking about the wash sale provisions. In commerce the term “wash sale” is used to describe the sale and purchase of the same asset within a short period of time. Because the sale and the purchase effectively cancel each other out the result is there is no change in exposure to the asset by the owner. For example, if a person sells Telstra shares just before June 30, and buys them back after June 30, the Tax Office may well take the view that the only purpose of the transaction was to reduce capital gains tax and so attack it under Part IVA.
But it’s a grey area – one person might hold Telstra shares and sell them prior to June 30 on the basis they were overpriced and would be cheaper after June 30. That would not be attacked by the Tax Office but the onus proving your motives is on the seller. Another person might have made a capital gain during the year, so decides to sell shares that carried a yet-to-be-realised capital loss clearly to reduce or eliminate a capital gain. That is a type of transaction that could come under scrutiny from the Tax Office.
However, if you are simply disposing of shares, it is normal practice and absolutely legal, to choose which shares in the parcel you are nominating for cost base purposes.
I love the calculators on your website. However, I was wondering what the best way is to calculate final compound returns each year after adjustment for the tax component. The only way I can see to do this is by manually adjusting the annual return once the tax has been paid on the earnings, but this is very cumbersome as each year has to be treated individually based on returns. Do you know of any way this can be automated to make establishing net compound returns easier?
This is not a simple matter. For starters, a major part of the returns from share-based investments come from capital gain, which is not assessable until the asset is sold, possibly many years in the future. Furthermore, the rate of capital gains tax that would apply in the future depends on the owner’s tax bracket at that time. To make it more confusing, some share-based returns are franked, some are partly franked and some are not franked at all. And the balance of the asset at the end of each financial year would be influenced by whether earnings were reinvested or taken in cash. Most fund managers produce an annual tax statement and their website usually displays the performance of each of their funds on a one-year, three-year and five-year basis. I suggest this would be your best source of information.
My account-based pension and a fraction of my defined-benefit, indexed, CSS pension pass to my spouse at my death. The balance of the former and the notional balance of the latter have increased since July 1, 2017. Will the transfer balance caps of the income streams be the new increased values when my spouse becomes entitled to them or relate to my values from July 2017?
They are usually valued at the date the survivor commences the pension. Where, as appears to be the case here, they are reversionary, it is the value as at date of death, even though it is not actually recorded against the survivor’s transfer balance cap for 12 months from date of death. Commonly the Commonwealth public service schemes pay 67 per cent to the surviving spouse but it can be higher. The 12 months is so the survivor can sort out what to do. It is always best to check with the provider.
I’ve nearly paid off my home loan, but am looking at renovations that would set it back 10 years. Should I pay off the loan first or invest more in the house now?
Do the renovations now – then you will pay for them at today’s prices and also get to enjoy them for 10 years longer. Once you draw the money try to raise your repayments on the increased loan to $12 per $1000 (eg $2400 a month on a $200,000 loan), which will see the whole loan paid off in 10 years with minimal interest.
- Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance.