Investor or Trader?

Hi, I have a trust which I use to 'buy and hold' shares. If I decide to keep these shares as a long-term investment but also buy some additional shares for trading how will the profits be taxed? If the short-term trades are declared as income does this affect the treatment of my long-term shares if/when I sell them, or would I still get the 50% CGT exemption? Can you claim some profits as income and other profits as capital gains within the same structure?

The reason I'm asking is because I've heard it's best to keep things separate, for example one trust for trading and a separate trust for holding investments but it would be simpler if I could buy them all in the one trust.

Regards, OLI.

 

Things could get a bit trickier if you are trading the same stocks that you are also holding long term. From a tax point of view are you going to trade first in first out FIFO or last in first out LIFO.

This is another issue you should be thinking about.

Cheers,

Dan

PS This is general information. Speak to your accountant or tax adviser to assess your personal information and tailor specific advice to your situation.

 

Hi Dan and thanks for the reply.

I'm not familiar with the tax issues related to trading First In First Out (although I know the Navra fund operates this way). It's something I'll have to look into! Can you give me a quick explanation please?

 

Hi Oli,

You can read a little about FIFO here First In, First Out (FIFO)

Cheers,

Dan

 

Out of interest why not go with min/max (minimise gains). Only situation I can think of for not using this method is if you had offsetting losses you wanted to use up and do some tax optimisation.

I was very surprised when Steve mentioned that Navra does FIFO too.

 

Yes, this would be my preferred option.

 

Accounting and tax are two separate things. I've not heard of ASIC requiring FIFO only for accounting, most fund managers would do average cost for accounting purposes.

For taxation in a majority of cases you should be doing min max, however this comes at an expense to the fund manager as it can be very complicated.

 

Hi Jabba,

Can you give us a bit more info about min/max as most of us only know LIFO and FIFO.

Cheers,

Dan

 

Its just another method of selecting which parcel is 'sold' to determine the cost base. What you would do is calculate the taxable profit that would be made if you sold each parcel, find lowest then that would be the one you record as selling. Thus minimising gains and maximising any losses. LIFO / FIFO are very simple to implement and probably why most people use it.

Depending on your tax situation you might even consider max/min (pay as much tax as possible on your sales) in order to utilize some losses you have obtained and reduce your future tax provision.

There is no one best method, it depends on an individuals situation. A person may want to get as close as they can to a desired figure in order to do this a combination of LIFO/FIFO/min max maybe used. (normally this is $0 for most people so min/max is generally better).

Though on an active portfolio, through discounted gains you can exploit hindsight and timing differences and get an even better result than min/max, however this is highly complicated process.