I’ve only lived in two countries for any length of time of time; the UK for the best part of two years and Australia for the rest. I’m not sure whether it’s cultural or my view is simply biased, but Aussies sure do love their tax breaks.
Perhaps Kerry Packer’s response at a Senate Select Committee hearing in relation to print media in 1991 summed it up best, ‘I pay what I’m required to pay, not a penny more, not a penny less. If anybody in this country doesn’t minimise their tax, they want their heads read because, as a government, I can tell you you’re not spending it that well that we should be donating extra.’
I don’t support a bloated public purse, either, but investors need to tread warily where the laws appear ambiguous or are easily misunderstood. In this Bristlemouth we’re going to elaborate on three rules in particular, but we’re also asking for your help.
If there is specific legislation that you consider commonly misunderstood or misinterpreted, or you have experience in the application of particular rulings, or perhaps there is a website that you find particularly useful, we’d like you to contribute to this blog.
We recommend that anyone harbouring doubts about their own particular situation seek professional advice, but perhaps with this blog we can create an early warning system against costly errors, without unduly feathering the government’s nest.
Holding period rule
The holding period rule dictates whether you are entitled to claim franking credits. The legislation from the Australian Taxation Office (ATO) website states:
‘The holding period rule requires you to hold shares ‘at risk’ for at least 45 days (90 days for preference shares) to be eligible for the franking tax offset. However, this rule does not apply if your total franking credit entitlement is below $5,000, which is roughly equivalent to receiving a fully franked dividend of $11,666 (based on the current tax rate of 30% for companies).
All this means is that you must own shares for at least 45 days, or 90 days for preference shares (not counting the day of acquisition or disposal), before being entitled to any franking tax offset.’
For investors with small portfolios this legislation can largely be ignored. But if you receive annual fully franked dividends approaching $12,000, you might want to stop to consider the timing of any recent share purchases before automatically claiming franking credits.
Margin loans are a common tool used by investors to leverage up their returns (and losses). A tax benefit accrues when interest applicable to the following year is paid in advance of 30 June. However unless the loan proceeds are used to buy stocks that produce income, you may lose your entitlement. The ATO website states:
‘You can claim for interest incurred on money borrowed to purchase shares and other related investments from which you derived assessable interest or dividend income. If you used the money you borrowed for both private and income-producing purposes, then you must apportion the interest between each purpose. Only interest incurred for an income-producing purpose is deductible.
You can claim for ongoing management fees, retainers and amounts paid for advice relating to changes in the mix of investment. However, you cannot claim a fee charged for drawing up an investment plan unless you were carrying on an investment business. You cannot claim a fee paid to an investment adviser for drawing up an initial investment plan which includes pre-existing investments.
You may also be able to claim a portion of other costs if they were incurred in managing your investments. Such costs would include travel expenses, the cost of specialist investment journals or subscriptions, borrowing costs, the cost of internet access and a capital allowance for the decline in value of your computer. For more information, read You and your shares 2007-08.’
In the US a ‘wash sale’, to use industry jargon, is said to occur when an investor sells a share to lock in a capital loss, but then repurchases those shares within 30 days. In this case, the series of trades is deemed to have the sole purpose of creating a tax benefit, rather than an economic one, and is therefore considered illegal.
In Australia a magnitude of time is not specifically mentioned by the ATO. However where a series of trades is not judged to have an economic affect, other than to give rise to a capital loss and tax benefit, the trade can be knocked back for taxation purposes and the claimant lumbered with financial penalties.
Tax time is just around the corner. If you have any insights or useful information to contribute, we encourage you to leave your comments at the end of this blog for the benefit of everyone wishing to maximise their financial position within the stipulations of the law.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.