LIC/ETF and tax strategy

Discussion in 'Shares & Funds' started by Dsign, 9th Feb, 2020.

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  1. Dsign

    Dsign Well-Known Member

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    Hi,

    What are peoples thoughts on tax implications for LICs and ETF in regards to accumulation phase and then to eventual passive income phase.

    If you are in the accumlation phase, wouldn't you be better off to be 100% growth e.g. VGS and then sell paying 20% capital gains then go 100% VAS for example when you want to then live on the income.

    As someone in the accumlation phase, and in the 37% tax bracket, it does make sense to buy 100% VGS then take a DRP and pay the additional tax on that income.

    What are peoples opinions on this and what would be the "ideal" strategy if your end goal in 10-20 years is to have as large as a portfolio as possible.
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Don't forget interest on loans used to buy shares will only be deductible where there is an expectation of dividends.
    Does VGS pay a dividend?
     
  3. Redwing

    Redwing Well-Known Member

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    yes, yield is around 2.4%
     
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  4. Snowball

    Snowball Well-Known Member

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    Don't forget, tax is still payable on this 2.4% yield. So around 0.9% is lost to tax @ 37%.

    With VAS dividends, they're typically 80% franked, meaning less out of pocket tax. 4% yield grosses up to 5.4%, less 37% tax leaves 3.4%. So around 0.6% lost to tax from the 4% cash yield.

    Oz dividends aren't taxed as highly as some assume. Doesn't mean you shouldn't buy VGS, it means probably don't focus too much on low yield = low tax, as in this case it's not the slam dunk it seems.

    Probably better to pick a long term portfolio you're happy with and simply keep adding to it to live off later, with no need to sell up and change the portfolio at the end. Simpler and less stressful too :)
     
  5. Redwing

    Redwing Well-Known Member

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    Why 20% CGT?
     
  6. Trainee

    Trainee Well-Known Member

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    some vague idea that the tax rate is 40% and they get the 50% discount.
     
  7. Dsign

    Dsign Well-Known Member

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    Regarding 20% CGT, i used this as a rough figure using 50% CGT with income tax rate of 37% - making total tax around 20%.

    Thanks Snowball, im still accumulating, and probably will be for the rest of my life but i do see wisdom in Buffets beliefs of reinvesting company profits rather then a dividend which does make sense to me if creating more wealth. Understandably different countries and tax policy etc.

    My thoughts are with the idea that the data i look at takes into consideration all franking credits added to the returns opposed to a taxed environment. With VGS generally out performing VAS over most 20+ year time periods by a few percentage points, i would think the taxed divvies would take a deeper total on total returns.
     
  8. Snowball

    Snowball Well-Known Member

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    You might be thinking of the US market only, rather than VGS (developed countries outside Oz). A quick look at Vanguard's index chart since 1970 shows VAS and VGS neck and neck, and does not include franking - Vanguard Index Volatility Charts

    US looks like clear winner in that index chart, but this tells us nothing of the future. Interestingly, since 1900 Oz and US have performed somewhat similar - US will fall more than Australia in next bust
     
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  9. Sydneyboy

    Sydneyboy Active Member

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    What about something like AFIC with DSSP during the accumulation stage, switching off DSSP when seeking dividends for passive income?
     
  10. Dsign

    Dsign Well-Known Member

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    Thanks, Yes that chart is ridiculously handy.

    My only issue is that with the dividend you would recieve is actually 3.6% and the chart accounts for full franking(?). Surely that compounding effect of 2+% p.a has a huge effect on the actual outcome.

    If i was smart enough i would run the numbers myself
     
  11. Snowball

    Snowball Well-Known Member

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    No the chart doesn’t account for franking at all
     
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  12. Ross Forrester

    Ross Forrester Perth business advisor and founder

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    Beware of having too much VTS or VEU - these are us domiciled and can create a death tax issue.
     
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  13. Never giveup

    Never giveup Well-Known Member

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    I am pulling approx $200K equity from my property and considering Tax/Debt Recycling/LT Growth....

    Any ideas/opinions on where to invest? Idea is all divis will go to prop loan regularly to pay down the loan....

    I have gone through few posts e.g. Franks investment etc and the main disclaimer is seek specific tax/FA etc...i appreciate that and interested to know an opinion of an individual qho is doing thinhs by themselves!!
     
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  14. Redwing

    Redwing Well-Known Member

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    US Australia estate tax treaty