Australian Investing Thread

[Rob_S]

stock market is having a FIRE-SALE!!! nothing like the smell of fear to buy more shares lol.

Is it really though? It hasn't dropped enough for me to change from debt pay down mode. It might soon though. I read somewhere that the banks were down approx. 20%?

For those looking for factor diversification within the Australian Share market (damned home bias) there's a new ETF which is closer to what I have been looking for.

Market Vectors Small Cap Dividend Payers ETF (MVS) tracks liquid dividend paying small caps.  They charge 0.49% p.a.
http://www.marketvectors.com.au/funds/MVS/Snapshot/

Thanks for the tip-off. I'm going to keep an eye on this. I might switch some super into it and see how it goes. Cheers!

[marty998]

Banks are back where they were at the stat of the year. There was a bit of stupidity with some idiotic buying in late Jan/Early Feb.

[AustralianMustachio]

For those looking for factor diversification within the Australian Share market (damned home bias) there's a new ETF which is closer to what I have been looking for.

Market Vectors Small Cap Dividend Payers ETF (MVS) tracks liquid dividend paying small caps.  They charge 0.49% p.a.
http://www.marketvectors.com.au/funds/MVS/Snapshot/

For me the ETF is too new (literally days old) and small (less than $30m AUM) to invest in, particularly outside of Super (in Super there is less risk of large capital gains tax bills if the product is tax-inefficient or closes due to lack of interest).  And I would prefer it to emphasise Value or Shareholder Yield rather than dividend payers.  But its a step in the direction of a lower-cost rules-based small cap fund that avoids the "growthiest" small cap stocks (in Australia that has historically been junior miners but who knows what the future holds).

Thanks for the tip off superannuationfreak. I agree it's too early and too small to invest in. A bit like MVW. Me personally I'd probably go with a LIC which covers smaller or midcaps over something like this

[dungoofed]

thanks both. yeah to me it's a line ball decision, I was on the cusp of buying VGS and flipped the other way. The only other plus i'd add for VTS/VEU is you can tinker with the US/non-US split, if you so desire.

I'm VGS/VGE because I believe they are less correlated than VTS/VEU. There's overlap of course, but anyone who owns VAS also has overlap with VEU or VGS.

Incidentally there are a couple of interesting wholesale funds which may be available via your super provider eg VAN0003AU which tracks the MSCI World ex-Australia Index. YMMV but it could form a part of strategy.

[potm]

VGS is ex Aus, does not overlap with VAS.

[dungoofed]

Indeed - thank you! Another reason I went with it in my initial analysis.

[marty998]

Hindsight is a bitch.
Couple of years ago I was looking at Blackmores at around $12-$15. Dammit lol it's now trading around $70.

Reminded of it now because June Money Magazine has a little write up on it as a solid small-mid cap. Money is also keen on Capilano Honey, Domino's Pizza and Reece.

I've been buying VHY (Vanguard High Yield ETF) for the past 6 months but am having a look at VSO (Vanguard Small Companies) as an alternative to the un-diversified nature of VAS.

VSO has only returned 1.37% pa since inception - quite extraordinarily low for 4 years. As the economy rebalances out of mining (and potentially housing) in theory it should be a boon for consumer/service type businesses and stocks in VSO should pick up.

The top 10 in VSO are: Aristocrat, Challenger, Ansell, Duet, Echo, Spark, Orora, Fairfax, IOOF and Dulux, representing about 21% of the fund.

I think the main benefit to VSO is that it avoids banks and resources for the most part. You can get exposure to the rest of the economy through it.

[AustralianMustachio]

Personally I'd be much more inclined to go with a fund manager in the small cap section (gasp I know, sacrilegious to mention here), because the market is much less efficient at that end of the market. Very easy for the small cap managers to simply avoid the dogs at that end of the market. And there are many, many dogs! Pretty much any small cap manager worth his salt has at least doubled the returns of VSO over the last decade or so.

Pity Hyperion has closed to new investors, I liked the look of that one particularly.

Even looking at the website undertheradarreport, their small cap picks have averaged something like 30%. And that's a site you can sign up to for free by just typing in an email address.

[FFA]

I've been buying VHY (Vanguard High Yield ETF) for the past 6 months but am having a look at VSO (Vanguard Small Companies) as an alternative to the un-diversified nature of VAS.

I still prefer global shares for the ASX concentration issue. Although i'm finding it hard too lately as the global share indices keep riding high and the AUD falls, they are getting quite lofty nowadays. Equally after a bit of pullback on the asx lately, the old franked dividend yield /home bias argument starts to become very tempting too !

Also as per AustralianMustachio, I understood Oz small caps was one area where it's generally better to have an active manager (?). I believe the issue is the index itself, being heavy with spec miners, which can be easily outperformed just by dodging a few of these duds.

[marty998]

Yeah tend to agree...it's just that going with a small cap manager exposes you to paying up to around 3-4% a year in fees. So you have to be pretty confident they are going to have outperformance every year consistently in order to do well.

[AustralianMustachio]

Yeah tend to agree...it's just that going with a small cap manager exposes you to paying up to around 3-4% a year in fees. So you have to be pretty confident they are going to have outperformance every year consistently in order to do well.

I haven't checked out many funds myself, but 3-4% seems a bit extreme. 1 - 1.5% seems the norm, with outperformance fees if it does indeed outperform. My thinking tends to be that if it's outperforming, then I guess it's ok to pay those fees, because it's coming out of extra performance anyway. If it doesn't outperform, you don't pay the fees

Disclaimer - i don't hold any of these funds myself and haven't really thought it through too deeply!

[FFA]

Usually yes, but if the outperformance is driven by an easy benchmark then perhaps not.

[bigchrisb]

With the sustained selloff in the last month, today I started dribbling money back into stocks - bought $10k of VAS.  Who knows what's going to happen over the medium term, but I'm now at a value point where I'm prepared to divert some of my cash flow from debt reduction to stock purchase.

Anyone else starting to see more value in stocks?

(yes yes, I'm a naughty market timer).

[marty998]

Yes I can see the value, but IMO stocks, especially banks and resources, have got a little further to go.*

I can see XJO heading towards 5000 before it goes back towards 6000. One of these days one of my 1000s of predictions will come true.

DYOR

* Should clarify that the reason for this view is that credit growth is not what it once was and the banks margins will come under increasing further pressure.

Regarding resources, it's obvious, prices are down, and staying down.

[chasinggains]

With the sustained selloff in the last month, today I started dribbling money back into stocks - bought $10k of VAS.  Who knows what's going to happen over the medium term, but I'm now at a value point where I'm prepared to divert some of my cash flow from debt reduction to stock purchase.

Anyone else starting to see more value in stocks?

(yes yes, I'm a naughty market timer).

Yeah the market is looking a lot more attractive than it did a month ago, although I'm going to have to hold off buying some more until after my holiday ! :(

[superannuationfreak]

Usually yes, but if the outperformance is driven by an easy benchmark then perhaps not.

That's my concern with many small cap funds that charge performance fees.  The small ordinaries index has performed poorly so, for example, having a "small cap" labelled fund with mid-cap and/or micro-cap exposure has generated performance fees against potentially the wrong benchmark.  I'm not sure if there are also problems like front-running of the index but think it would be susceptible to that.

While I would like to follow a small-mid cap value index there isn't a low-cost product out there.  I have a small exposure to the LIC QVE which aims to be low-turnover, value oriented and benchmarked against the ASX excl. the top 20, but is still actively managed and a bit more expensive than I'd prefer (0.8-0.9% p.a.).  I also have some FGX but I have mixed feelings about it as the underlying funds it holds are not that transparent and I'm not sure they'll be very tax-efficient.  It is pro-bono though (donating the 1% "fee" to charities) so I don't feel too bad about the cost-side.

[dungoofed]

So digging through some mail that had built up over the last few years I found I have a non-trivial number of Singtel shares.

http://info.singtel.com/about-us/investor-relations/delisting-of-singtel-shares-from-asx

"...trading in Singtel CDIs on the Australian Securities Exchange (ASX) will be suspended on and from 29 May 2015 (Suspension Date), and Singtel will be removed from the official list of the ASX on 5 June 2015."

I purchased them as Optus shares about 15 years ago and was in the DRP initially but they seem to have got rid of along the way and I started receiving dividends. Luckily I found this now because some deadlines have passed and others are coming up fast.

I think I'll keep the holding on the SGX and continue to receive dividends, paid in SGD and converted to AUD, but would be interested to hear what anyone else in this situation is doing/would do. I know US companies buy out Australian companies and delist from the ASX from time to time, but with Singapore I believe the tax treaty means there is no franking but no tax on the Singapore-side.

This episode also has me thinking about what kind of shares I want to be holding in 15 years time. When I look at the actual share price of Singtel it hasn't actually done much over the long term, so if there are any Australian companies I want to be an owner of I should probably just bite the bullet and buy the shares now.

[dungoofed]

With the sustained selloff in the last month, today I started dribbling money back into stocks - bought $10k of VAS.  Who knows what's going to happen over the medium term, but I'm now at a value point where I'm prepared to divert some of my cash flow from debt reduction to stock purchase.

Anyone else starting to see more value in stocks?

(yes yes, I'm a naughty market timer).

Yeah the market is looking a lot more attractive than it did a month ago, although I'm going to have to hold off buying some more until after my holiday ! :(

Would love to be participating in a little market timing myself but all my free money is somewhat tied up for the time being (and probably a good thing).

[dungoofed]

Third post in a row on this thread. I do have a life outside this site. Honestly! haha

So yeah, two questions:

1) Any good starting place to find the best superannuation provider? Was there some stuff on the first page of this thread? Back in the country and I have almost finished consolidating all the meager amounts here and there from all the part time work I did over the years. But IOOF is charging me a lot each month just for the wrap, and I think I can do better. Also every time I want to change something I need to step back into the 80s and fax off forms with certified copies of drivers licenses etc. Still it seems better than AMP, which has great customer service but managed to temporarily lose the entire balance of one of my accounts for a few days, and has been extremely expensive.

2) Does anyone *prefer* to hold their investments with US companies (Blackrock, Vanguard, Fidelity etc) as opposed to Australian companies (Magellan, Macquarie, etc)? I seem to have a massive bias in this regard in that I don't know whether I trust corporate governance in Australia as much as I do that in the US.

[qwerty8675309]

1) Any good starting place to find the best superannuation provider? Was there some stuff on the first page of this thread? Back in the country and I have almost finished consolidating all the meager amounts here and there from all the part time work I did over the years. But IOOF is charging me a lot each month just for the wrap, and I think I can do better. Also every time I want to change something I need to step back into the 80s and fax off forms with certified copies of drivers licenses etc. Still it seems better than AMP, which has great customer service but managed to temporarily lose the entire balance of one of my accounts for a few days, and has been extremely expensive.

I went through the process of moving to a new superannuation provider just a few months back. The best that I found was SunSuper, which has a few great index funds on offer. I split my super into 50% Australian Shares (Index) and 50% International Shares (Index). The fees are $78 p.a., plus 0.3% p.a on your investment amount. Not too bad when you compare them to some other superannuation funds charging around 1% p.a. They also have an indexed bond fund too, which is good if you don't want as much risk. Of course, this assumes that you're a fan of indexing.

SunSuper also announced recently that they are partnering with Vanguard, so we might see a larger variety of funds going forward (and hopefully lower fees!). There's also a blog run by superannuationfreak (http://superannuationfreak.blogspot.com.au/) which is a good read.

[potm]

Good summary of ETFs here. Unfortunately they don't seem to take any tax considerations into account.
https://www.stockspot.com.au/static/reports/Stockspot-ETF-Report-2015.pdf

[FFA]

any Westpac shareholders out there considering the btim offer ? I've only had a brief look at it and at first glance am not very keen, but interested to hear any views.... thanks

[ynotme]

Hi all - another aussie here.

potm - that ETF report was interesting. Thanks for posting.

I was wondering if anyone has any investments focused on Asia. I've bought some IAA which is an ETF of the 50 largest companies listed in Hong Kong, Singapore, South Korea and Taiwan. This doesn't cover India which I also wanted exposure to. These investments will only be a small percentage of my portfolio but I believe there is potential for long-term growth in Asia.

Anyone want to share their strategy if investing in Asia through the ASX?

[Wadiman]

Ynotme -

I am interested in asian investing as well.

I currently hold ishares japan ETF which has been doing nicely (40% over last two years) and ishares IEM ETF (emerging markets has quite a few asian shares including some of the bigger Hong Kong-based Chinese companies) but - like you - want to increase my exposure to India and mainland Chinese companies.

Have thought about IZZ - ishares China large cap ETF but haven't invested as yet (fortunate given recent tanking but has grown 70% over last two years).

IBK ETF covers the BRIKs and is about the same level as it was 5 years ago so that's not too impressive to say the least!  Am not aware of any sole Indian ETFs listed here.

[ynotme]

Have thought about IZZ - ishares China large cap ETF but haven't invested as yet (fortunate given recent tanking but has grown 70% over last two years).

I've looked at this too but it's grown so quickly that I wonder if it's sustainable. There's a heap of money that seems to be piling into the Chinese share market so who knows, it may continue to go up.

Good work on investing in Japan. You seemed to have picked the right time to get in.

[dungoofed]

Thanks potm.

While I'm not yet convinced Stockspot is doing anything profound I'm glad that they're at least pointing the spotlight on the Australian ETF market. Their ETF ratings somewhat line up with the kind of criteria that interest me. And good on them for highlighting iShares being 2x the price of Vanguard in some cases for little or no benefit.

As for region-based indexing, if you already hold a global index then the only places I'd consider overweighting are the US and Australia. The former because I'm still a closet bull on the US, and the latter for tax and lifestyle hedging benefits. Maybe a speculative trade on Russia. Otherwise I'm happy to ride the indexes for international exposure.

[potm]

What is interesting is the dramatic increase in overseas ETFs in the past year, the recency bias is strong.

[FFA]

just took a look, yeah, not profound mostly lifted from the monthly asx etf/lic report, but still quite useful to split it all out into the various sectors.

Indeed huge international growth, doubled. Some of that is capital appreciation, since those funds went up much faster. Some of it could be the "stabilisation" of the global economy (or people becoming more and more complacent about the way things are). Agree a chunk of it is also recency bias, people chasing the latest returns, and punting on the AUD continue to plummet further....

happy to see the etf's i'm in (vas ioz vts veu) all get the stockspot 5 stars of approval :)

[This_Is_My_Username]

If a company has a $1.00 profit, and the company chooses to distribute the 70 cents, with a 30 cent franking credit.
 
1.   Our zero tax payer (say a super fund in pension mode) gets the 70 cents, and then gets the franking credit refunded.  It then has $1.00 it can spend or reinvest.

2.   Our 39% taxpayer gets the 70 cents.  The taxpayer owes 39 cents in tax on this money.  They get a credit for the franking credit of 30 cents, and pay the remaining 9 cents.  They are left with 61 cents to spend or reinvest.

3.   Our 49% taxpayer (high income earner) gets the 70 cents.  The taxpayer owes 49 cents in tax on this money.  They get a credit for the franking credit of 30 cents, and pay the remaining 19 cents.  They are left with 51 cents to spend or reinvest.


Instead, our company chooses not to pay a dividend, and invests the 70 cents in its operations. The price of a share goes up by 70 cents. Our shareholders would have to sell shares to access the funds.

1a. Our zero tax payer would sell 70c of shares.  As they pay no tax, they don't pay any capital gains.  They have 70 cents to spend or invest. They are worse off than if the dividend was paid.

2a. If our 39% taxpayer wants to reinvest the money in the company (not sell the shares), they have invested 70c.  They are better off than getting the dividend. 

2b. If they want to spend the money, they would have 70c of capital gain to declare.  Say they wait a year for the 50% discount.  They would pay 13.65c in tax (70*.5*.39), keeping 56.35 cents. They are worse off than being paid the dividend.

3a. If our 49% taxpayer wants to reinvest the money in the company (not sell the shares), they have invested 70c.  They are better off than getting the dividend. 

3b. If they want to spend the money, they would have 70c of capital gain to declare.  Say they wait a year for the 50% discount.  They would pay 17c in tax (70*.5*.49), keeping 53 cents. They are better off than being paid the dividend.

The quote above (plagiarised from bigchrisb) shows that:

during the FIRE accumulation phase, the most effective strategy is to accumulate unreliased capital gains with a high salary at the 39% or 49% marginal tax rate.

during the FIRE drawdown/unemployment phase, the most effective strategy is to receive dividends.

What is the most effective way to transition your investments from zero-dividend growth investments, to high-dividend investments, at/near your FIRE date??
Excluding superannuation, because it is too far away.

I've done a few excel simulations of selling an entire zero-dividend portfolio ($X00,000) and buying high-dividend investments.  Depending on the assumptions, the capital gains tax bill eliminates most/all of the tax benefit of accumulating unrealised capital gains.  It might(?) be just as good to accumulate high-dividend shares from the start, and put up with the non-optimal taxation of dividends for 80k+ salaries.

How is this transition best handled?

Thanks

[potm]

As I pointed out last time as well, the CGT figures have assumed the full amount as being CG. Only the actual profits are subject to CGT so the amount of tax for CGT is even less.
Super is the obvious scenario where dividends are better due to the concessional tax rate.

Outside of super it will depend on the size of your stash.

This is only looking at things from a pure tax perspective. If you are picking individual stocks there's many other factors to consider, such as how effectively the company is investing retained earnings. If you are investing over a long period of time you may find that low dividend payers become high dividend payers as the businesses mature and there's less opportunity for investment.

[FFA]

Maybe better to avoid extreme moves, but directionally skew new investment towards yield as you near FIRE date ?. (I guess this is common sense, most retirees are yield chasing!). Personally, I think it's good to have a portfolio of growth/dividend orientated stocks in both accumulation and post FIRE, rather than all one or the other. It might be hard to predict marginal tax rates too, e.g. you decide to work sporadically post-FIRE, your tax position can change substantially from year to year, but it's hard to shift your assets without CGT effects.

An example might be : if your accumulation phase AA is 50% oz index etf / 50% global index etf. In the five years before FIRE, perhaps you start investing fresh funds at 75/25% (oz/global) to increase the yield over growth orientation. If you want to go further, perhaps substitute the oz index etf for a high yield variety (e.g. VHY instead of VAS). As per potm, you need to consider it holistically though and understand such action is fundamentally changing your AA (oz vs global exposure), not just the tax aspect.

[dungoofed]

This is only looking at things from a pure tax perspective. If you are picking individual stocks there's many other factors to consider, such as how effectively the company is investing retained earnings. If you are investing over a long period of time you may find that low dividend payers become high dividend payers as the businesses mature and there's less opportunity for investment.

Blackmores came up in conversation yesterday for this very reason:

http://dividends.com.au/dividend-history/?enter_code=BKL

Would be perfect if one had have invested in it 15-20 years ago, looking to retire now.

[ynotme]

I'd never make investing decisions based on tax reasons. I'm happy to see my dividends growing even if I have to pay tax on them.

One of the reasons I haven't invested in property is because most are cash-flow negative. However I have wondered if pairing a leveraged investment property and a dividend-paying share portfolio might be a good combination. If overall your investments are cash-flow neutral during the accumulation phase so you don't pay any additional tax. If you pay off the loan before you retire, you could live off rent and dividends when you retire. You are also diversified across asset classes.

[bigchrisb]

What is the most effective way to transition your investments from zero-dividend growth investments, to high-dividend investments, at/near your FIRE date??
Excluding superannuation, because it is too far away.

I've done a few excel simulations of selling an entire zero-dividend portfolio ($X00,000) and buying high-dividend investments.  Depending on the assumptions, the capital gains tax bill eliminates most/all of the tax benefit of accumulating unrealised capital gains.  It might(?) be just as good to accumulate high-dividend shares from the start, and put up with the non-optimal taxation of dividends for 80k+ salaries.

How is this transition best handled?

Thanks

I've found investing through a trust very powerful for this.  Buy your asset allocation in the trust.  While high tax and accumulating, stream any dividends  and franking credits to a company beneficiary.   Reinvest it at company tax rates (same impact as the underlying holding reinvesting rather than paying a dividend).  When after the income, stop paying the dividends to the company, and pay to yourself.   Stop reinvesting dividends in the company and pay them to yourself too. 

If you need to draw down, think about the tax consequences.  Sell  down stock in the company holding, and you will not get CGT discount.  But you will be able to pay it out as a fully franked dividend (all the divis on the way in store the franking credits).  The franking credits will run out when you redraw your original contribution and reinvested dividends, but won't cover any actual capital growth on the shares in the company. 

Once that pool of franking is exhausted, then start drawing down capital gains from the shares in the trust - as you will be able to claim CGT discount on that.

That structure means no need to realise capital gains to change your tax treatment between accumulation and draw down.

Hope that helps and makes sense?

[dungoofed]

Not sure if anyone else saw in the latest Sharesight email but they had a small list of Australian fintech (hate that word!) startups that showcased at the recent Fintechhub Sydney (http://fintechhubsydney.com):

stocklight.com
hashching.com.au
www.moneybuddy.com.au
https://simplywall.st
www.moroku.com
https://bankstatements.com.au

YMMV but nice to know from time to time what the developments are in this space.

[dungoofed]

If a company has a $1.00 profit, and the company chooses to distribute the 70 cents, with a 30 cent franking credit.
 
1.   Our zero tax payer (say a super fund in pension mode) gets the 70 cents, and then gets the franking credit refunded.  It then has $1.00 it can spend or reinvest.

2.   Our 39% taxpayer gets the 70 cents.  The taxpayer owes 39 cents in tax on this money.  They get a credit for the franking credit of 30 cents, and pay the remaining 9 cents.  They are left with 61 cents to spend or reinvest.

3.   Our 49% taxpayer (high income earner) gets the 70 cents.  The taxpayer owes 49 cents in tax on this money.  They get a credit for the franking credit of 30 cents, and pay the remaining 19 cents.  They are left with 51 cents to spend or reinvest.


Instead, our company chooses not to pay a dividend, and invests the 70 cents in its operations. The price of a share goes up by 70 cents. Our shareholders would have to sell shares to access the funds.

1a. Our zero tax payer would sell 70c of shares.  As they pay no tax, they don't pay any capital gains.  They have 70 cents to spend or invest. They are worse off than if the dividend was paid.

2a. If our 39% taxpayer wants to reinvest the money in the company (not sell the shares), they have invested 70c.  They are better off than getting the dividend. 

2b. If they want to spend the money, they would have 70c of capital gain to declare.  Say they wait a year for the 50% discount.  They would pay 13.65c in tax (70*.5*.39), keeping 56.35 cents. They are worse off than being paid the dividend.

3a. If our 49% taxpayer wants to reinvest the money in the company (not sell the shares), they have invested 70c.  They are better off than getting the dividend. 

3b. If they want to spend the money, they would have 70c of capital gain to declare.  Say they wait a year for the 50% discount.  They would pay 17c in tax (70*.5*.49), keeping 53 cents. They are better off than being paid the dividend.

The quote above (plagiarised from bigchrisb) shows that:

during the FIRE accumulation phase, the most effective strategy is to accumulate unreliased capital gains with a high salary at the 39% or 49% marginal tax rate.

during the FIRE drawdown/unemployment phase, the most effective strategy is to receive dividends.

What is the most effective way to transition your investments from zero-dividend growth investments, to high-dividend investments, at/near your FIRE date??
Excluding superannuation, because it is too far away.

I've done a few excel simulations of selling an entire zero-dividend portfolio ($X00,000) and buying high-dividend investments.  Depending on the assumptions, the capital gains tax bill eliminates most/all of the tax benefit of accumulating unrealised capital gains.  It might(?) be just as good to accumulate high-dividend shares from the start, and put up with the non-optimal taxation of dividends for 80k+ salaries.

How is this transition best handled?

Thanks

Anyone have any experience with Endowments on the ASX?

According to the ASX literature on Warrants:

Endowments are long term call warrants
typically with a 10 year life at the time of issue.
They are over an ASX quoted security or basket
of securities. Endowments are promoted as
investment products to be bought by investors
and held until expiry.

The issue price of an endowment is between
30 and 65 percent of the market value of the
underlying security at the time of issue. The
exercise price (called the “outstanding amount”
of the endowment) is initially the remaining sum
plus other costs.

The outstanding amount varies over the life
of the warrant. In this respect endowment
warrants differ from most warrants as they
do not have a fixed exercise price.

The outstanding amount is reduced by any
dividends that are paid in relation to the
underlying security. In some instances other
payments may also reduce the outstanding
amount. However, an interest rate is also
applied and the outstanding amount is
increased by these interest amounts.

At expiry, if you exercise the warrant and pay
the balance of the outstanding amount (if any)
the issuer will transfer the underlying securities
to you. Ideally the reductions applied against
the outstanding amount exceed the interest
incurred over the life of the warrant, and the
outstanding amount will have decreased. It
could reduce to zero prior to or at expiry. If
this occurs you may only have to pay a nominal
exercise price such as one cent.

An investor in endowments is taking a long
term view on the underlying company’s dividend
policy versus interest rates with the belief
that the dividends will outweigh the interest
payments and the outstanding amount will
reduce over time.

The issuers of endowments can provide you with
details of the outstanding amount and the expiry
dates of particular endowment warrant series.

My understanding is that these are a potentially tax-effective way to accumulate a dividend stock. You pay a deposit which is usually 30-60% of the current market price of the underlying, then any dividends paid are used to reduce the outstanding balance, less inflation. Term is usually 10 years. And since no dividend is paid to you over the term there is no taxable event yet you have real exposure to the stock's capital growth and real benefit from the dividends. Then at the end of the term if you convert to shares you have no CGT until you sell.

The main risk seems to be that inflation ramps up and outpaces the dividends. I am trying to find out whether the opposite case, where you receive too many dividends over the term, bringing the balance to zero (ie essentially rendering them "lost"), is also a risk. And of course there is treatment of warrants in "exceptional" cases (takeovers, bankruptcies, etc) which you need to be aware of.

I only have experience with PMGOLD in the world of warrants on the ASX, but I'm trying to find out more now. Seems like a lot of the literature talks about leverage risk, which doesn't really affect you if you plan to hold the shares over the long term anyway. What is interesting to me is the thought of putting together today your "retirement portfolio" of say 10 blue chips that you'd want in 10 years time, add another 2-4 in case something goes wrong or as something to sell in order to pay the outstanding balances in 10 years time, then put down the deposits now and forget about them until you're ready to retire. In reality I don't think I'd bet my entire retirement on something like that but if the figures made sense I could see the benefits of adding some warrants from a tax point of view.

[Wadiman]

I've done a bit of googling on this and am not clear on potential tax implications.

Any thoughts as to whether steps 4 to 8 in the arrangement below would be ok from a tax perspective?:

1.  Establish a sub-account within a line of credit secured against PPOR (principal place of residence) specifically for share investment
2. Use sub-account to fund equity portfolio acquisition (say $100k total investment)
3. Claim interest on $100k as tax deduction (say $4500 in year 1 - 4.5% interest)
4. Pay tax refund into PPOR LOC sub account
5. Pay dividends into PPOR LOC sub account
6. At end of year 2, equity LOC has interest capitalised and total owing is now $104.5k
7. Claim 4.5% of 104.5k as tax deduction
8.  And so on until PPOR is paid down then start repaying investment loan (while still claiming relevant deductions).

[deborah]

Dividends are income. Income gets taxed. Of course they also have franking credits, so they may increase or decrease your income tax.

[Wadiman]

So Deborah - that is to say there is no obligation to direct them towards the LOC equity sub account in this example - correct?

What about capitalising the interest - any view on the deductibility of that?

Thanks!

[ynotme]

I have a LOC on my PPOR that I buy shares with and the interest is tax-deductible. I use it solely for investment purposes so I don't mix up deductible and non-deductible debt.

A few thoughts on your strategy:

• Dividends are income that you can use for whatever purpose including paying off your home.
• My LOC has the condition that I pay the interest accrued each month (effectively an I/O loan) so you may want to check the loan repayment conditions with your lender.
• My LOC also has a maximum amount that I can draw down on so you will reach a limit at some point.

[marty998]

Yeah you've got to be careful with capitalising interest - most loans and LOCs can be interest only, but lenders are probably going to get stricter on products allowing you to capitalise interest.

I've done a bit of googling on this and am not clear on potential tax implications.

Any thoughts as to whether steps 4 to 8 in the arrangement below would be ok from a tax perspective?:

1.  Establish a sub-account within a line of credit secured against PPOR (principal place of residence) specifically for share investment
2. Use sub-account to fund equity portfolio acquisition (say $100k total investment)
3. Claim interest on $100k as tax deduction (say $4500 in year 1 - 4.5% interest)
4. Pay tax refund into PPOR LOC sub account
5. Pay dividends into PPOR LOC sub account
6. At end of year 2, equity LOC has interest capitalised and total owing is now $104.5k
7. Claim 4.5% of 104.5k as tax deduction
8.  And so on until PPOR is paid down then start repaying investment loan (while still claiming relevant deductions).

Have you phrased this right? Why would you direct all dividends and tax refunds into your PPOR investment LOC loan, instead of your existing PPOR non-deductible loan?

[Wadiman]

Yeah you've got to be careful with capitalising interest - most loans and LOCs can be interest only, but lenders are probably going to get stricter on products allowing you to capitalise interest.

I've done a bit of googling on this and am not clear on potential tax implications.

Any thoughts as to whether steps 4 to 8 in the arrangement below would be ok from a tax perspective?:

1.  Establish a sub-account within a line of credit secured against PPOR (principal place of residence) specifically for share investment
2. Use sub-account to fund equity portfolio acquisition (say $100k total investment)
3. Claim interest on $100k as tax deduction (say $4500 in year 1 - 4.5% interest)
4. Pay tax refund into PPOR LOC sub account
5. Pay dividends into PPOR LOC sub account
6. At end of year 2, equity LOC has interest capitalised and total owing is now $104.5k
7. Claim 4.5% of 104.5k as tax deduction
8.  And so on until PPOR is paid down then start repaying investment loan (while still claiming relevant deductions).

Have you phrased this right? Why would you direct all dividends and tax refunds into your PPOR investment LOC loan, instead of your existing PPOR non-deductible loan?

Hi Marty -

Yes - have phrased correctly - I would be looking to pay down the non-deductible PPOR LOC sub account - ie pay off my home loan quicker with the tax refund and dividend payments.  I have a 'global' LOC with multiple sub-accounts for a range of specific purposes - deductible and non-deductible (but each sub account is one or the other - no mixing!)

[This_Is_My_Username]

wadiman, it is a great time to do this at the moment.

home loan rates are 4.0 - 4.5%.

share returns are much higher than this in the long run.

[idjces]

I've done a bit of googling on this and am not clear on potential tax implications.

Any thoughts as to whether steps 4 to 8 in the arrangement below would be ok from a tax perspective?:

1.  Establish a sub-account within a line of credit secured against PPOR (principal place of residence) specifically for share investment
2. Use sub-account to fund equity portfolio acquisition (say $100k total investment)
3. Claim interest on $100k as tax deduction (say $4500 in year 1 - 4.5% interest)
4. Pay tax refund into PPOR LOC sub account
5. Pay dividends into PPOR LOC sub account
6. At end of year 2, equity LOC has interest capitalised and total owing is now $104.5k
7. Claim 4.5% of 104.5k as tax deduction
8.  And so on until PPOR is paid down then start repaying investment loan (while still claiming relevant deductions).

Im not sure on the rules but from what i've read from links such as http://m.brokernews.com.au/news/breaking-news/ato-slams-most-common-investment-strategy-as-illegal-182211.aspx and others on the 'hart' case, its probably a very bad idea.

Best practise would be to pay LOC interest out of investment income and any shortfall covered by personal income. If there is excess investment income then how you spend/invest the excess would not matter.

It seems like a grey area but 'snowballing' deductible interest sounds like its asking for a tax audit.

I went with a regular home loan with 'splits' which can be repurposed to be deductible (Eg pay off and redraw). Every lender I spoke to advised against LOC's saying regular splits achieve the same prupose with a lower interest rate. You can't capitilize past your LOC limit and any LOC adjustment requires a comprehensive credit application again.

[bigchrisb]

Who are people using for international brokerage at the moment?

I was about to buy a parcel of BRK.B via nabtrade, but shied away at the 2%+ spread on the exchange rate with them.  The brokerage itself is ok, but the level of spread on the forex seems like a shocker (think of it as a 2% front load!).

I used to use IB before their margin lending issues, and they were pretty cost effective.  Any other ideas for a brokerage for international stock, with good brokerage rates, acceptable FX and no custodial fees?

[marty998]

whopping gigantic distribution of $2.74 out of VHY this quarter.

anyone have a clue as to why? Perhaps some rebalancing in the ETF triggered some large capital gains.

Bit surprised by it, based on history I was expecting about $1 per unit as the distribution.

No biggie, all gets reinvested for me. Have boatloads of capital losses to chip away at so hopefully the tax components are capital gains and not income.

[DrowsyBee]

bigchrisb (or anyone else with knowledge, for that matter), question for your question.

I've been looking into stuff like BRK.B for a while and thinking about starting some international trading as well. However, one of the thoughts I had was to take advantage of having a US citizen for a partner, is this something I could really take advantage of (once married of course) in the long term?

Or is that level of detail just unnecessary?

[bigchrisb]

whopping gigantic distribution of $2.74 out of VHY this quarter.

anyone have a clue as to why? Perhaps some rebalancing in the ETF triggered some large capital gains.

Bit surprised by it, based on history I was expecting about $1 per unit as the distribution.

No biggie, all gets reinvested for me. Have boatloads of capital losses to chip away at so hopefully the tax components are capital gains and not income.

Saw this and also wondered - its suspiciously large.  I had a look at the list of shares (https://www.vanguardinvestments.com.au/retail/broker-basket?fundId=47&basketType=) and the list is quite different from that on 31 May (https://static.vgcontent.info/crp/intl/auw/docs/etfs/profiles/VHY_profile.pdf?20150625|091500) .  The top 10 have changed from

TLS, WES, WBC, WPL, CBA, ANZ, NAB, SYD, DUE, MQG
To
TLS, ANZ, NAB, RIO, BHP, WBC, CBA TAH, DUE, SKI

This suggests that there is a lot of portfolio churn in this fund within the last month - 4 of last months top 10 are no longer top 10 holds. Makes me think there will be a lot of capital gains distributed from this fund, and makes me question the long term tax efficiency of it vs a more passive buy and hold fund (like VAS). 

[bigchrisb]

bigchrisb (or anyone else with knowledge, for that matter), question for your question.

I've been looking into stuff like BRK.B for a while and thinking about starting some international trading as well. However, one of the thoughts I had was to take advantage of having a US citizen for a partner, is this something I could really take advantage of (once married of course) in the long term?

Or is that level of detail just unnecessary?

Sorry - no idea about this!  Suspect there may be some potential for tax arbitrage, but I think the US in particular is picky about taxing citizens on global income. 

[dungoofed]

bigchrisb - oh god don't get me started on retail forex rates.

I'm also interested in hearing what people are doing in this regard. I had an account in Japan which gave decent rates but I liquidated it before I came to Australia recently.

A few of my foreign friends in Japan said that the best option was to have an HSBC Premier account, then wire money from Japan to HK where they had an IB account. Unfortunately HSBC pulled out of Tokyo but they still have a strong presence in Australia.

This is the kind of setup I'd like to work towards and from what I understand the tax accounting is really simple but like you I'd prefer to speak to someone who is doing it from Australia before I take the plunge.