Author Topic: Sell and pay massive CGT to move to cheaper & more tax-efficient vehicles (AU)?  (Read 249 times)

conwy

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I'm in a bit of a quandry.

I'm an Australian investor. Most of my net worth has been held in a Vanguard High Growth Index fund. It's in a managed fund vehicle, rather than an ETF, so I use Vanguard's platform and BPay the funds in.

Unfortunately this is looking less and less optimal as time passes...

1. I can't control the asset allocation as much as I want to now. Now I want to increase my exposure to Small Cap + Value, but that would require rebalancing the other investments, which I can't do, since they're all held in the one Vanguard fund
2. The Managed / Pooled Fund vehicle is less tax efficient whenever there's a lot of selling in the fund, due to capital gains being realised when the fund sells rather than when I sell units. (See: The problem with pooled funds)
3. Vanguard has apparently suddenly started charging a new 0.2% "account fee" on top of its regular fees, so that means my fees have effectively doubled!

So I now really want to get the money out of the Vanguard managed fund and into a set of ETFs which I have more control over and pay lower fees to maintain.

The problem is, if I sell down all my holdings in order to convert them to ETFs, I could be in for a whopping CGT event. It doesn't help that I'm also in the highest tax bracket right now, due to working two jobs.

I guess the best way to decide is probably just to calculate as accurately as possible the total CGT I'd have to pay if I sold, and then calculate the cost of not selling (fees, potential opportunity cost of not being able to rebalance) and try to see which option is cheaper in the long-run.

Wondering if anyone has any thoughts about the pros/cons of holding vs. selling?
What would you recommend in this situation?

Thanks for reading!
« Last Edit: April 18, 2021, 11:23:45 AM by conwy »

MrThatsDifferent

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Too complicated for me to answer and too complicated for me to fix as Iím in a similar situation to you. Iím just not going to sweat the extra costs. Not sure why you didnít put this in the Aus investing thread?

conwy

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Too complicated for me to answer and too complicated for me to fix as Iím in a similar situation to you. Iím just not going to sweat the extra costs.

I'm thinking along similar lines - just let it be and focus on future investments and/or just enjoying life.

I do have an extra lump sum of cash sitting on the side, so I'm thinking I'll invest that one into a couple of factor ETFs and hopefully at least approach my target allocation.

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Another thought I have is that if/when I take time off work for a full tax year, then my taxable income from employment will $0, so I'll be in the lowest tax bracket. Then if I sell just enough of the Vanguard fund to generate capital gains less than the tax-free threshold (I think it's $20k or so) then I won't be taxed on those gains. Then I can purchase more ETF shares with those funds. If I can stretch this out over ~5 years, I can probably convert a large portion of the Vanguard fund to ETFs without CGT.

Another slightly more risky approach would be similar to the above, but also using debt to purchase the ETFs earlier so that I can get exposure earlier. So for example:

1. Borrow $20k at the beginning of the 2022 tax year
2. Invest the $20k in ETFs immediately
3. Sell enough Vanguard assets to generate $20k+ capital gains
4. Use those assets to pay off the $20k loan
5. Repeat

Could increase the amount of debt in order to increase the exposure.

They say debt leverage is risky, but at such a small amount, and with the intention to sell anyway, it doesn't seem like much of a risk.

Not sure why you didnít put this in the Aus investing thread?

Good point; I'll post it there.

Murdoch

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Hi Conwy,

Few queries on your situation:
- What does your IPS say and when did you write it?
- Did you only start investing <12 months ago, and if so why was VHGIF right then but not now?
- What do you lose by waiting till the shares hit 12 months and sell then? Perhaps a couple months of slight higher gains? Selling now incurs a known costs (full CTG) with an unknown (potential but in no way guaranteed) upside (higher market return on a more aggressive shares allocation).

I don't want to assume, but it seems you've put a reasonable amount of dosh into VHGIF but have changed your mind about this decision during what is a remarkable stock market rally, and it will be important to self reflect on why you've changed your mind. If you are early in investing career then I would suggest you follow your original IPS. If you can't stick it during a bull market you may struggle even more during a bear market. Learning your personal tolerance to market fluctuations (highs and lows) is vital to setting a robust IPS to see you through thick and thin and improve long term chances of success.

Regarding Vanguard Australia 0.2% added fee. This came into play late last year. However, if you held a fund prior to its implementation you would be considered a 'direct account/investor' and not a 'personal account/investor', and therefore not incur this extra fee. That is my situation, and as long as I only use the funds I held at time of change over I don't incur the 0.2% fee. Agree completely it is less and less worth it to hold Vanguard funds in this fashion as the 0.2% addition drives some funds unacceptably high for passively managed index funds.

MrThatsDifferent, I actually like having these threads separate to the Aussie thread. It's a behemoth and hard to search (for me at least). Aussies have a strong presence on here, no reason we should be confined to a single thread like fenced in convicts:)

Murdoch

mjr

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There's always the option of leaving it where it is and diverting future investment funds into your preferred vehicle.   Depends on how much we're talking about and your future cash flows.

You mention 5 years @ $20k/year, so let's say you have $100k in there.  That's money, for sure, but it's not a huge amount and will ultimately be a small fraction of your total net worth.  TRhe extra $200 in fees won't break the bank and probably isn't worth worrying too much about.    This fund then becomes the first one you liquiddate when you do need the money..