Sharemarket Implications

The ASX and world markets are experiencing a dire change arising from the direct and indirect impacts of the global pandemic which appears to be likley to affect all world economies through supply, demand and shutdowns affecting economic activity on a micro and macro level..

At times like this many people ask tax questions about selling down investments to contain losses.

1. If I sell for a loss does it reduce my income?
Unlikely. Most owners of shares etc will hold them as CGT assets. If they dispose of these now for a loss a resulting CGT loss will occur. This closs can only offset a CGT gain. If it does not the CGT loss will carry forward indefinately. This loss is to be reported in the 2020 tax return.

If you are a share trader the loss will likely reflect as a revenue loss. However in order to use this loss you must meet one of several non-commercial loss tests if you wish to offset this against ordinary income. Otherwise the loss carries forward to offset future share income IF trading is maintained. If it does not the loss may be at risk.

2. If I sell down and cut losses should I repay my loan ?
Usually, Yes. Once the investmnets acquired with borrowed money are sold the deductibility ceases. However do not repay what you had originally borrowed. Only repay what your sales proceeds are. This may allow the shoftfall to be maintained as deductible. For a long time.

eg Fred borrowed $100,000 to buy bank shares in 2015. The loan is now $88,000. Fred considers selling all his shares and will realise just $58,000. The $30,000 that is not paid out would potentially allow a interest deduction in the future (many years even) despite the share being sold. It would be important to quarantine and leave this loan alone so that deductibility is not disrupted.

3. Can I sell my shares to my wife as I believe they will come good in time and she has no other income ? I'm happy to wait this out but would like to take my loss now and allow her gain to be tax free if possible.
Yes. Off market transfers are another alternative. Just be mindful that the ASX market value should be used for the transfer as the market value substitution rule imposes this.

4. I bought ETFs and these appear to be square. Should I seell now as I think losses may get larger. That is financial advice as your own judgement needs to address this. Nobody can predict what will happen. But I would always recommend you knowwhat your REDUCED COST BASE is. ETFs often pay AMIT amounts or tax deferred amounts in annual income. This REDUCES cost in most cases. If that happens you may actually trigger a CGT gain in the example give as the costbase is less than you think. So check this before selling. This issue doesnt usually affect shares unless a corporate action occurs eg Wesfamrre sand Coles demerger. This split the costbase. Make sure you know what each costbase is.

5. I have some gains and some losses I'm not sure how my total gains will calculate ? Good question. Many people get this wrong and it can change outcomes. By a significant amount.

All CGT assets except collectables work this way :
1. Calculate total CGT profits - Use 2 columns (discounted 12mth+ and non-discount <12mth). Do not use 50%. Use 100% at this time.
2. Add CGT amounts distributed by trusts in the tax year (likely only known at year end !!). Add to the respective column once discount is known. Do not halve it (yet)
3. 1+2 = Total gains
4. Calculate actual CGT losses in each column
5. Reduce 3 by 4 = Net gains. Deduct from the non-discount colum first THEN then the discount column ensuring no negatives.
6. Deduct prior year losses carried forward. Deduct from the non-dscount column first THEN then the discount column ensuring no negatives
7. If there is a number left in the discount column add half of this to any number in the non-discount column
8. This is the taxable gain and it will be taxed at your marginal tax rate.

6. Should I sell my investment property?
Property is a longer term investmnet which wont respond as rapidly to economic conditions. In the short term buyers may be scarce and fine their haelth impacts new loans and work. This could temporarily see sales demand fall but this may respond quickly as health improves. Property losses can be avoided if patience can be given. You only lose money if you sell. In time the economy and normality will return. The question is, when?

It may be wise to ensure a landlord policy is in place prior to any rental arrears to safeguard property income. LL policies are ineffective once arrears have commenced. 20% of Australians may be exposed to loss of income in some cases and the risk for property owners is their own cashflow as well as that of their tenant.

 

Hi Paul. What about, I am looking to accumulate shares during the downturn. Not huge money say 20 - 30k. Should I set up a trust?

 

Yes. Maybe
Or No.Maybe

 

I wonder if some may be using any cash in SMSF to directly purchase their personal holdings.

 

Provided its market value of listed securities for cash consideration (or a inspecie contribution within caps) it poses no immediate concern. The SMSF investment strategy would need to be up to date to cover the investment too.

 

7. My SMSF strategy is changing,. I am considering going 100% cash. Or buying a market opposed ETF such as BBOZ which offers a leveraged position. Is that OK ? Probably not unless some requirements are addressed first. The fund investmnet strategy should be updated prior to making this investment. A risk management statement and risk management policy should also be updated when ETFs like BBOZ are used as they use market leverage. This could pose a audit concern if ignored. And going 100% cash may also contradict the existing strategy. This would expose the fund to the auditor reporting a compliance breach. The investment strategy may need to address when this is to be disposed and how the risk of leverage harm is to be controlled. Investing in new direct global shares may also mean a risk statement be updated to include managing market timing and currency risks.

The ATO recently issued very concerning advice to SMSF auditors on investment strategies that fail to address these issues. Auditors may not accept a postdated updated investment strategy. A deed of rectification to a past strategy may need to be considered. And the ATO are quite clear now - Investment strategies must be written.