Author Topic: Australian Investing Thread  (Read 1091281 times)

BRAFRA

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Re: Australian Investing Thread
« Reply #4050 on: June 03, 2018, 10:24:57 PM »
I will add a few things:
-single 29
-Australian resident for tax purposes
-should be in the highest tax bracket in around 4 years
-plan to take a full gap year to travel (and liquidate all the CGT) in 5-6y

Ok. Obviously you are a beginner investor.
Mainly new to the country, completely different rules and investment models.

Shares should be bought and held for about 10 years - otherwise, because they have a lot of ups and downs (volatility), you are being risky. If you want to invest for a short period, things like bank term deposits are the traditional way to go. Divide the money into longer term and shorter term requirements, and invest it appropriately.
I don't mind volatility and keen to take risk.
My tax bracket is 37%, so 39% of the interests on a term deposit goes away, so 3% becomes 1.8%, less than the inflation.

CGT is really not much on what you are investing - it's only on the actual capital gain - not the full amount. If you've had the investments for more than a year the gain is halved, and then your marginal tax rate is applied. And, if you sell at a loss that can be used against years that you sell at a profit.
ATO: Individuals and small businesses (excluding companies) can generally discount a capital gain by 50% if they hold the asset for more than one year.
I will check more on the ATO website how they calculate the CGT and what they consider as an asset.
As I plan to travel during a FY, I want to liquidate all the assets with high CGT during this low income year.

Why do you want to reinvest dividends? It is the easiest way I can think of to get yourself in a muddle. You have to declare the dividends as income anyway. You have to keep tabs on exactly how many you bought at every dividend and when you sell each individual parcel. If you have more than one investment, dividend reinvestment will skew your portfolio.
Where I come from, the reinvested dividends can stay in the "product" and become part of the CGT when you sell the "product".
For example, VGS reinvests the net dividends. Does this mean Vanguard already paid my income tax or only the company tax ?
« Last Edit: June 04, 2018, 03:25:47 AM by BRAFRA »

PDM

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Re: Australian Investing Thread
« Reply #4051 on: June 04, 2018, 12:09:04 AM »
In my basic understanding, in ETFs all distributions (they don't pay dividends) are treated like cash for tax purposes. It doesn't matter if they are reinvested.

If you are on a Distribution Reinvestman Plan (DRP) they will use the distribution to buy 'new' units at the current market rate. I think this is what Deborah is getting at. When you sell, to calculate the CGT you'll have to use the difference between sale price and purchase price. This may be 16 different very small lots. 4 per year - each might be 6 or so units (depending on returns etc).

It isn't the end of the world - and just means you're better off keeping a spreadsheet to track purchase prices.

deborah

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Re: Australian Investing Thread
« Reply #4052 on: June 04, 2018, 11:49:14 AM »
Firstly, with any investment there are two ways to make money - income and capital gain. Shares give you income in the form of dividends, and may go up in value, so that when you sell them you get more money than when you bought them. Similarly, houses bought for investment give you income in the form of rent, and capital gain when you sell them.

In Australia, both the income and the capital gain are taxed separately.

Broadly speaking, any money you get as income is taxed, generally at the source. If you buy a stock and you donít give the company your TFN, they will tax your dividend at the highest marginal tax rate. If they have your TFN, they wonít tax it but theyíll send the tax office information about your dividend payment, and youíll have it already prefilled when you come to do your tax return (unless you fill out your tax return too early).

In Australia we have franking credits - as the company has probably already paid tax on the dividend they give you, you donít have to pay the tax again on that dividend (income). Because you are on a 37% marginal tax rate, and company tax is currently 30% your share dividends will probably mean you get little extra tax from your dividend income. However, some companies donít pay much tax (for instance mining companies setting up mines have a lot of expenses they can claim against their tax) so may give dividends without many franking credits. When you get your dividend statement it will tell you just how much tax has already been paid. The dividend income will be added to your other income, and then the franking credits youíve already paid will be taken off what you need to pay in tax. This is regardless of whether or not you are involved in dividend reinvestment.

If you spent money to earn that income, you can claim it against the income. In the past, your expenses for attending a companyís AGM could be deducted from your income, and if you have a loan for the investment itself, you can claim the interest of that loan as an income deduction. You have to be able to prove to the ATO that your deductions are solely related to the investment (donít take a holiday at the same time as you go to the AGM). I think attendance at an AGM was taken out in the last budget, but I donít go to any, so Iím not sure. Many people with investment property have more deductions than income from the property, so they end up with less income than they received from their job - this is called negative gearing. As you plan to buy shares without a loan, I assume you wonít be negative gearing.

Whenever you buy any investment (including in DRPs), you have a base price for that investment - what you paid. Base prices can be adjusted - for inflation, or if the capital value of the investment has changed in any other way. With shares, this can happen if the company decides to have a share split or various other mechanisms. When you sell your investment, the difference between the price you receive and the current base price is the capital gain. Occasionally, companies give you money other than dividends, and the ATO rules whether you have received a dividend or a capital gain (for instance when a company sells part of itself, like the banks are currently doing with their financial services arms) or something else. When you get the statement from the company, it will advise you where the ATO ruling is, so you can work out how to complete your tax return.

If you sell an investment after less than twelve months, you are considered to be playing the market for a living rather than investing. Because of this, capital gains in the first twelve months are considered income, and after twelve months CGT is halved. So, the capital gain is the actual increase between the pile of money you had originally and the pile you received when you sold it (subject to changes in the base price as above).

This (or half of it) is considered to be income, and is treated similarly to other income. However, if you have a capital loss you can only offset it against capital gains, not against other sources of income. To make things more equitable, the loss can be carried forward, and offset against capital gains in future years.

However, like with negative gearing, itís a bit stupid to want a capital loss. You want your investments to grow, and capital gains are only taxing you for what you have earnt from your investment.

Now, in your particular situation, I donít understand why youíre bothered about capital gains. Surely you will take your gap year from January to December or something, so that you have two years at a very low marginal tax rate. If you continue to pay super during this time, you can virtually set your own marginal rate. Any capital gains on shares you sell during those two years will be taxed at almost nothing.
« Last Edit: June 05, 2018, 01:33:54 AM by deborah »

BRAFRA

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Re: Australian Investing Thread
« Reply #4053 on: June 06, 2018, 08:20:39 AM »
Thanks Deborah for sharing all this information, things are so clear now.

Now, in your particular situation, I donít understand why youíre bothered about capital gains.
Based on the Australian rules you described, there seem to be limited optimisation available around CGT minimisation.
I see one loophole: to get rid of some shares before moving to the next tax bracket and "save" in my case half of 45%-37%= 4% of the capital gain.

If you spent money to earn that income, you can claim it against the income. In the past, your expenses for attending a companyís AGM could be deducted from your income, and if you have a loan for the investment itself, you can claim the interest of that loan as an income deduction. You have to be able to prove to the ATO that your deductions are solely related to the investment (donít take a holiday at the same time as you go to the AGM). I think attendance at an AGM was taken out in the last budget, but I donít go to any, so Iím not sure.
Are the management fees, for example from a Vanguard wholesale fund, deductible ?

Luckyvik

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Re: Australian Investing Thread
« Reply #4054 on: June 06, 2018, 08:29:53 PM »
Either way, without knowing exactly how the money is invested means I'm not going to touch it.

I'm not interested in investing with them but their portfolio breakdown is actually quite informative and I found it quite easily just by clicking on the relevant thing and scrolling? Not only do they tell you exactly which companies are included, but they also provide a blurb on what each company is about. For the Universe one they also tell you why they like the company but tell you the risks as well.

I stand corrected - hadn't seen that!

Yeah you can see all the portfolio companies on https://www.spaceshipinvest.com.au/invest/universe and https://www.spaceshipinvest.com.au/invest/index
I was looking at the 'indexed investment' option for this fund and it concerned me that the listed investments under this investment option are picked by spaceship therefore it doesn't seem to reflect a particular index such as the ASX 200 or a worldwide index therefore it seems to me it's not an index fund it's an actively managed fund. I think the name index fund for this investment option is misleading.

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pistolpete

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Re: Australian Investing Thread
« Reply #4055 on: June 13, 2018, 05:53:28 PM »
Ok peeps, what would the best scenario be in regards to wanting to open a vanguard wholesale fund with the quoted 100k buy in?

I have around 100k in a issue lics (ago,  Milton,  Whitefield,  similar to vas but higher franking and smoother divs)

Looking to open the vanguard international fund and maybe another fund so 70k in and maybe 30k another wholesale fund.

Instead of using my own money I would borrow from the bank 100k even tho i have around 115k cash at bank and claim the interest at tax time and let the loan tick over and pay it off whilst reinvesting the distributions as well as dividend reinvestment of my lics.

Any feedback to approaches in how to get into the wholesale fund whilst also having my a aussie lics and blue chips???

MrThatsDifferent

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Re: Australian Investing Thread
« Reply #4056 on: Today at 01:36:47 PM »
Iím curious about peopleís ER strategy. So, say you retire at 50. You canít touch your super for 10 years (presume you donít early withdraw at 55 because you donít want the tax hit). So, then what you can access is cash or investments outside of super. But if you sell your shares you get a CGT hit and then you impact the growth, which will impact what you need to have at 60 to live off 4% for life.

Currently Iím thinking, if I want to live off $40k a year, then take $18k from investments cause itís tax free, and have $22k in cash saved for 50-60. Does that make sense?

What are the rest of you doing? Rental income?

Iím perplexed.

Richmond 2020

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Re: Australian Investing Thread
« Reply #4057 on: Today at 02:30:06 PM »
Iím curious about peopleís ER strategy. So, say you retire at 50. You canít touch your super for 10 years (presume you donít early withdraw at 55 because you donít want the tax hit). So, then what you can access is cash or investments outside of super. But if you sell your shares you get a CGT hit and then you impact the growth, which will impact what you need to have at 60 to live off 4% for life.

Currently Iím thinking, if I want to live off $40k a year, then take $18k from investments cause itís tax free, and have $22k in cash saved for 50-60. Does that make sense?

What are the rest of you doing? Rental income?

Iím perplexed.

Good question iím struggling with this one also.

In my case it will likely be a far less than ideal multifaceted strategy. A combination of dividends from stocks, selling some stocks, cash and rental income.

The less than ideal part of this strategy for us will be once weíre both drawing our pensions we may find we have too much money for the later part of our Retirement phase.

First world problem I guess. But the flip side is that if this is the case we have probably spent to much time slaving away 9 to 5. I guess it will come down to finding that sweet spot where we stop accumulating and start selling some shares.


Richmond 2020

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Re: Australian Investing Thread
« Reply #4058 on: Today at 02:41:35 PM »
The other thing we are toying with his living OS in a LCOL area for a portion of the time between ER and being able to access our super. We would rent out our place and use the differential in rent to help fund the gap. Lots of potential issues with strategy including capital gains tax implications.

ozbeach

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Re: Australian Investing Thread
« Reply #4059 on: Today at 02:43:10 PM »
Iím curious about peopleís ER strategy. So, say you retire at 50. You canít touch your super for 10 years (presume you donít early withdraw at 55 because you donít want the tax hit). So, then what you can access is cash or investments outside of super. But if you sell your shares you get a CGT hit and then you impact the growth, which will impact what you need to have at 60 to live off 4% for life.

Currently Iím thinking, if I want to live off $40k a year, then take $18k from investments cause itís tax free, and have $22k in cash saved for 50-60. Does that make sense?

What are the rest of you doing? Rental income?

Iím perplexed.


Only 50% (assuming you've had for more than 12 months) of the capital gains are considered as taxable income. So if you bought 20,000 shares five years ago at $10 per share (total $200K) and they are now worth $15 per share or $300K, you could sell 3,000 shares for $45K (to fund your living expenses for the year). The total capital gain is $5 per share x 3,000 = $15,000 and only $7,500 is taxed.


And don't forget the possible imputation credits on top of that.
FIREd @ 52

deborah

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Re: Australian Investing Thread
« Reply #4060 on: Today at 02:45:47 PM »
I was stupid, and had five yearís cash. I then planned to use super, but didnít for long because the cash lasted longer than I thought it would. Why worry about the tax hit - youíre going to be on a much smaller income, so the tax hit is much smaller than it would be now. I guess you could use insurance bonds if you start them soon enough.

The other thing is that tax is not something to be avoided. We get a lot of services for our taxes. Planning a strategy just to avoid tax is silly - you should adopt a strategy that maximises your overall outcome. If youíre going to end up with too much super anyway, why not start accessing it as soon as possible? One advantage of early access is that they are less likely to change the rules for you.