Markets Down - Strategy of Buying to take profit

Discussion in 'Accounting & Tax' started by [email protected], 3rd Apr, 2020.

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  1. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    Some with savings are buying into markets seeking to later resell at profit when this is over. With the ASX off so much its opportunity to profit on the rebound

    I will set aside the asset risks and exposure for now and focus solely on the tax issues that this may produce.

    1. Is interest on borrowed $$$ deductible. Not likely.
    2. When I resell only half the profit is taxable right ? No.

    Why ? Whats different ?

    Buying shares or ETFs Trusts etc etc with a intention to resell for profit is old tax law. Long before CGT laws were added to tax law. Its worth revisiting these older concepts since its times like this tax agents will need to remind clients of how tax law works and clear any confusion.

    Buying shares in this manner is not a CGT event since there is no CGT asset. The purchase is an isolated profit making intention and a revenue account asset. This prevails unless there is no CGT asset under the dual taxation laws to prevent double tax. The ordinary income tax rules apply first unless the asset is a CGT asset. These will apply the taxpayers marginal tax rate to the resulting profit. Any costs incurred may be deducted. eg interest. So any interest deduction is deferred to match the profit. Apportioning issues will pose a issue for some taxpayers and a reasonable appotionment is only required provided there isnt a blended loan.

    Q : So if I hold off and sell after 12mth + 1 day only 50% is taxed right ?
    No. The assets were never a CT asset so a CGT event doesnt occur. So no discount can occur either.

    But I reckon the shares may pay a dividend ? They used to.
    Is that why you bought them ? The key issue is eleigibility and intention when you buy. Many distributions and dividends will be suspended if they have not already. In some cases a person who does buy to seek the dividend income may have acquired the shares on CGT account. eg Fred owns 4,000 CBA shares and loves the idea they are now cheaper and wants to double down for the long term. That seems OK and he wil likely demonstrate that intention by - Not selling over the medium to long term. Each case must be considered.
     
  2. Terry_w

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

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    Practically speaking it will be hard to be considered on revenue account without clear evidence. If the shares are trading stock though the interest should be deductible.

    Can the concept of isolated transactions be applied to shares?
     
  3. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    The intention to produce a isolated profit. Yes. Not in all cases of course.
    Isolated profit making isnt share trading hence no trading stock account. (the three tax methods. 1, capital events = CGT, Revenue Events = Trading or isolated)

    A person who has a record of infrequent share acquisitions is less likely to suddenly face the issue. eg Fred. But a revenue event is not automatically a CGT event. This is the key issue.
    Remember the old pre-CGT days? (Yeah I'm showing my age but its a trap some younger tax`advisers may miss) I find yound tax students surprised when they learn once CGT profits were not even taxed. Old laws resurface at times. The law didnt change it was just CGT law was added. Back in the pre-CGT days tax` advisers always had to ask about intention when shares were sold. Did you buy them to produce income? If they dont seem to have a capacity it pay income it mean they were subject to tax. If you bought div paying shares and happended to sell them to rebalance risks etc it was tax free. Back then buying shares which may have paid a dividend but were acquired for profit making were subject to tax.

    eg Stephanie has $30K saved.. She says hey look markets are down and I want to make some $$$ and opens a Commec account. If I leave it in the bank I get 0.2%. Meh. She buys $10K of VAS as this spreads risks arising from a individual company failing. Her plan is to buy and resell in maybe 6 months. And maybe if it falls further another $10K Then take a profit when we emerge from our caves.

    Some say - But hey its a CGT event and there isnt a discount. Thats not quite true. yes the outcome is the same but the old laws consider this isnt actually a CGT event as it was never a CGT asset. The tru mischief and error could occur is Steph waits for 12mth + 1 day to sell thinking its then 50% subject to tax.
     
    Last edited: 3rd Apr, 2020
  4. Terry_w

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

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    The key is to leave evidence...
     
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  5. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    And dont be so obvious