LIC & LIT Listed Investment Companies (LICs)

Great to hear! This was pretty much how I calculated it myself, but just wanted to check I wasn't missing something, as it appeared to be a bit of a "free lunch."

Gotta love LICs and the free lunches they sometimes put on!

 

This is great TF. Really appreciate your posts. I'm just starting to accumulate some LICs so this is all very helpful.

 

Yes, big Kudos to The Falcon for your invaluable help!
Cheers mate

 

Picked up a small parcel of MLT at 438cps this afternoon, line ball NTA which was ok as I wanted to deploy a little more capital. ARG and AFI both rose today despite XJO off 1.5% lol. They seem immune to the recent volatility which makes for poor buying.

 

Important reading for anyone wanting to use AFI or WHF bonus share plan. Viz. CGT treatment/cost base.

https://www.ato.gov.au/General/Capi...ent-Company-Limited-(AFIC)--bonus-share-plan/

 

I recall on Commsec they used to sell themed "bundles", like a high growth bundle, low growth but low risk etc. Are these LIC's or some other type of product?

 

Sounds pretty good to me!

 

Not really a free kick for me, unless ;

1. Your are top tax bracket holder, with no need of current income
2. You intend to begin taking dividends after 20 years or so, and never sell.

The never sell part is critical. The key takeaway from the ruling (I checked and WHF is the same) is that the DRP price is not used as cost base for the bonus share plan (which makes sense). Cost base is as per original purchase price.

This spoils the free lunch somewhat, but still in the right circumstances a useful tax planning tool.

No what these are is a list of individual "blue chip" stock positions intended as buy and hold positions (presumably). The broker can generate a lot more fees this way than buying a single LIC or ETF.

 

If they were trading in blue chip high end banks in Aust equities which some have a very high% invested in banks then over the past 6 weeks ,and unless they sold the highs and bought back in then sold again as some do they would still be down..

 

Hum I could have sworn they were a single transaction purchase. Not "here's 10 picks, buy each one separately". I'll have to log into my account and check next week.

 

They may just bundle the brokerage fee but they are individual stock positions.

 

Speaking of LICs trading at a discount / premium to NTA - check out AGF! It looks like it's trading about 30% below NTA at the moment...

(Its a LIC invested in the Chinese market)

 

Yep, beware bargain hunting with LICs......large NTA discounts (ie. anything more than 10%) when you have the big 3 trading at a premium are usually there for very good reasons. These can include, no faith in management, very low liquidity, poor performance, high fees, piles of outstanding options, huge overweight to an overvalued stock etc. A good number are perennial dogs and to be avoided at all costs.

Oils aint oils........same with LICs.

 

You are correct in that it lowers your cost base for the bonus shares and thus increases the capital gain and the CGT payable upon sale. For sure if holding for say 20 years, the capital gain would be most likely pretty massive when taking the original purchase price as base cost.
Regarding the income aspect, I would argue subscribing to the bonus share plan in the first place means one does not need the income from the investment right now.
It would be interesting to run a comparative analysis on the BSP and the DRP and see what the outcome is in both case and which is a better outcome: paying income tax each year on the DRP but with the franking credits or capital gains upon the sale (assuming we hold over 12 months for the 50% CGT discount).

I don't think I had placed enough emphasis on the necessity of never selling. Even thought it is the intention, things and circumstances do change and one can be brought to selling even though this was not the initial intention: I know it has happen to me in the past, so this is certainly something that needs attention.

 

So I've chucked some numbers on a spreadsheet to try and compare both scenarios. Made a few assumptions:

• 3% annual growth rate in the asset value (share price)
• 3% annual FF dividends
• 37% tax bracket
• No selling until the 20th year

Didn't spent too much time on it, so it would not be surprising if there were errors, or even the approach might be wrong altogether. Anyone wants to have a look at it?

Excel file link: http://www.filedropper.com/bspvsdrp

From the results I have it looks like the BSP is the better option by 6% over a 20 year period.

If anyone looks, keen to hear your thoughts.

 

I was looking through Morningstar's LIC Report:

http://www.morningstar.com.au/s/documents/201505_ASX-LIC-NTA-Report.pdf

I noticed a few LICs invested in international equities on there, some paying fully franked dividends. Some are LIC versions of unlisted international equity funds such as Magellan, Platinum. However these LIC version pay fully franked dividends. On the Platinum website, they talk of the difference between the LIC and the unlisted fund is simply in the way it's taxed.

Does this mean that you can get the added diversification of investing overseas and still get franking credits? Or I wonder, is what you get in franking credits is simply making up the difference from what you'd otherwise get in investing in the underlying fund. No free lunches, etc. etc.

 

Thanks for mentioning the AFIC DSSP, Ouga, and sharing your spreadsheet. Its interesting to play around with different cost base, annual growth figures, etc.

Personally, I am not a fan of the DRP - I don't feel the 2.5% discount is sufficient to compensate for being locked in to buying those shares on that day (I prefer to buys one of several LICs in dips and/or NTA discount)s, and I don't like the paperwork complications of small DRP purchases. So, for me, its a comparison between taking the dividend and investing it wherever and whenever I like, and enrolling in the DSSP.

The DSSP would also complicate paperwork, with having to apportion bonus shares to existing holdings, which is a disincentive, but shouldn't be a deciding factor. If I thought I was going to be on a lower tax bracket in the medium term I would probably go the DSSP, otherwise I am not sure. So much can change - tax rates, tax law, personal circumstances. It's good food for thought.

 

Thanks for your message. No worries, I am also trying to wrap my head around the best approach on this one. I was happy and surprised to find AFI had a bonus share plan. I was going to go down the DRP route, but now it's making me rethink things!

Hoping perhaps The Falcon can chip in on this one, not sure the spreadsheet is entirely correct, I could have make some mistakes or forgotten some things.
Regarding the paperwork, it seems the DSSP would create more paperwork than taking the dividend as income directly, but I suppose (perhaps naively?) there will be a nice statement from Commsec with the details of the transactions that have occurred and I can let the accountant worry about the calculations? Although is there any paperwork involved prior to sale (except from keeping records)? From the ATO link The Falcon has provided, it looks like all the bonus shares are regarded as having been acquired at the price of the first share bought. All that is needed - I guess - is to know how many bonus shares have been acquired throughout the life of the investment in order to be able to separate them from the regular purchases. I am assuming broker statements would show that? Then capital gain can be calculated on these shares together with the first shares bought, and the rest of the regular purchases can be treated normally. Perhaps it would complicate things for these bonus shares that have been held for less than a year and which do not benefit from the 50% CGT discount? I can't recall if the ATO document addresses this.

Personally the attraction with the bonus share plan is the passive nature of the approach, to let the compounding do its work in the background. So in this regard I am not looking to actively find investment entry points for my dividends, but I see what you are saying though: if you take the dividend you can decide whether to put it back into the LIC or perhaps allocate to an ETF or another stock if the LIC is trading at a premium - it could save you a few %. You have to factor in the brokerage however. Personally I am looking for a passive investment to compound in the background and where I can add to my position when the time is right. With the view of switching to receiving dividends as income at some point in the future.
But of course, things can change and if they do, that's when the question arises for the DSSP.

 

Under the pump at the moment guys but will give my 2 cents (that's all it's worth) once I get a chance

 

Getting really confused with the DSSP.

But in the back of my mind I'm wondering is it really worth the hassle? To do all that research just for one share holding.