Capital Loss and CGT

This was following on the other thread (interest deductability), however this purpose is different (ie to lower your effective tax rate, rather than as a debt reclying strategy)

Say i currently have 5000 in non discountable gains and an effective tax rate of 30%

Buy a share before dividend day, sell on the ex div date - collect the FC to offset the income and gain a capital loss...

your overall net worth would not be effected (except by brokerage), however you would get the capital loss to offset the non discounted gain, and you would get the FC to offset the income tax payable on the dividend - end effect would be nil tax, rather than the 30% tax paid with out buying for the dividend.

Buy doing this, id spend money in brokerage but save myself $1,500 in tax payable

Does anyone have an opinion abaout this? Would people see it as something to create a better over tax position.

 

Yep,

Effectively tax-free income (MTR 30%) in exchange for a capital loss deduction.

Don't forget if your MTR is less then you will be getting a tax refund, but your capital loss deduction is smaller. This might be a good strategy if you only have discount capital gains and a lower MTR.

Reminds me of the old dividend stripping schemes.

Cheers,

Rob

 

I thought it would be better with non discountable gains, can you explain why it isnt?

Would many people practice it these days. I know with the 5000 Franking credit rule it would be hard to do it on a large scale but their still must be benefit in it...

 

Yep,

Generally better if you have a choice, to select a discount capital gain to set off losses against.

However, if you are on an even lower MTR then tax deductions are not so useful but the refundable franking credit is a dream.

Effectively, if your MTR is less than 30%, the fully franked dividends are more valuable than any tax deduction (including setting off capital losses) since the company has prepaid 30% tax and you are getting some back as a refund.

Even better if you only have a discount CG to set off as you get even less deduction out of claiming the capital loss, also the discount helps keep you on a low MTR.

Note this supposes that the market value of the security only falls by the cash amount of the distribution, i.e. the franking credits are not priced into the movement.

Cheers,

Rob

 

This was the subject of the Eureka Report's article, More than the Bare Share Essentials, by Cameron McNeilage.

And it's the same reason that Off Market Share Buybacks (like BHPs mammoth one last year) are so successful. Why sell BHP at a 14% discount to market> Because there's a whopping capital loss and heaps of franking credits.

Yes, it works. Dividend stripping is well accepted, and achieving a direct capital loss is likely, but offsetting other capital gains and keeping the franking credits makes it work.

Rob, I'm not sure I agree with you, I think it works best with non-discountable gains, as the CG write-off happens before discounts are considered (ie you can't take a 50% CGT discount on the difference).

I might check this with a spreadsheet.

 

Yes Rod,

If you have a choice, then set off losses against your non-discount capital gains.

The reason is that your loss must be applied before any discount - effectively discounting your loss for the dicount method.

I got sidetracked by an unusual scenario for very low rate taxpayers, where capital losses are almost worthless, but franking credits are always valuable.

I think it is interesting that deliberately selling and repurchasing, or selling to a related party, merely to realise a capital loss to set off against other capital gains (wash sales) will attract Part IVA.

In the stripping case, beneficial ownership changes so this will not apply. Given the qualification requirements for franking credits (45 day rule, no arrangements, etc..), this method is restricted to small scale so I don't think the Commissioner would get too agitated ??

Cheers,

Rob