Making a profitable capital loss

Yes, this sounds a little odd but bare with me.

I'm selling my IP next financial year and will be hit with a significant capital gains bill.

I'll also be (I hope) getting good income from investments that are being put into place now.

So I'll be up for a hefty payment.

This financial year, however, I expect to have no taxable income.

I was planning on putting significant funds into the Vanguard Wholesale Australian Share fund as a buy and hold to deliver ongoing dividends.

But a clever (maybe) financial friend suggested something different at the pub tonight.

He said I should try for a 'profitable capital loss'.

Instead of the Wholesale fund (which distributes quarterly) he reckons I should buy into the retail fund which distributes bi-annually.

Given the dividend payout of Oz companies this year, the June distribution is likely to be very large.

Equally likely is that the price of the fund will drop straight afterwards.

His suggestion is that if it does, I sell straight away and take the capital loss which I can then use against my capital gain from the IP.

So I get the (mostly franked) distribution when tax is at its lowest, and can reduce the CGT when tax is higher.

Beer made it seem to make sense.

Does it?

 

Good in theory, but how much of a loss are you expecting and will it be more than the income? Factor in the risk too

 

Maxing out $25k Super Concessional contributions and if able to bring forward the following year’s contribution to reduce capital gain by $50K.

If the market tanks during this period sell anything at a loss and buy something similar (to avoid wash sale risk) so position in the market is maintained but the loss can be used to offset part of IP capital gain.

Accountants will have other ideas.

Not advice.

 

You should also get advice on the tax laws re dividend washing.

 

Why not sell the IP this financial year if you have no taxable income!
Marg

 

Don’t forget the 45 day holding rule either to make sure you actually get the franking credits.

 

Yep, the plan would be to basically buy now.

 

Youll then be exposed to whatever the market does in the next 45 plus days.

 

Indeed. But if it goes up I make more money this FY, and if it goes down I make money this FY and a bigger capital loss next FY.

 

Well, I did it last week.

Hopefully the latest Trump ructions won’t ruin my clever plan.

 

A capital loss can only be offset against capital gains before discount.

Say you make $100 in capital gains. Max you would pay in tax is $22.50 (excluding medicare levy etc).

You make a REAL $100 capital loss. You lose $77.50. To save $22.50.

Still make sense to you?

 

I will have a $200K capital gains tax bill next year (after discount).

I estimate there will be a $150K dividend paid June 30, and that the price will drop by that amount July 1.

If I sell, I have a $150k capital loss to offset some of the $200k gain.

Plus the $150k in dividends.

If it doesn’t drop in price, I have $150k I would not have had.

If it drops by more, or the market tanks, I have a year to work out when and how much to sell.

Or at least that’s the theory.

 

You understand ex date v payment date?

 

Ah.

That’s something I should have checked.

It appears the juicy distribution will be taxable next FY.

It would have been better this FY, but due to some unexpectedly high recent earnings it appears this years income will be higher than I thought.

Thanks for the pickup.

 

you cant back the shares for at least 30 days else it considered a wash sale and they disallow the loss.

 

Yep, aware of that.

 

My sideline LIC dividend play with PL8 just went ex-div on the 3.5c special dividend and immediately dropped by slightly more.

I bought it somewhat closer to the ex-div date than I should have, but I’m curious to see what happens leading up to the planned sell date post June 30.

 

Well, that didn’t work.

There was a chunky distribution, and the price did drop by the amount of said distribution as planned.

But since I bought the unit price has risen by more than the drop so I’m currently sitting on a capital gain.

Too clever for my own good. Once again.

 

Probably the initial flaw in the plan was right there.

Pity it didn't work out for you but now it's done and dusted it's usually best to concentrate on deployment of the capital and any profit rather than focus on the tax man's cut.

 

Seems like a lot of risk to take for the reward. There are also other ways to make capital losses but you'd need to know someone in that game: hedge fund managers and the like, who need to do it whenever they get the chance to offset their gains.