How to optimise stage 3 tax cuts for your returns

Factoring tax changes into your investment decisions

If you are planning on selling an investment, being aware of the tax changes can spell a significant difference in the returns you make.

To put it simply, if you are likely to crystallise a significant capital gain, you might find yourself paying more in tax on the returns if you were to sell the position now compared to after 30 June, depending on where you sit in the tax table.

So when should you sell?

“If you have realised capital gains this financial year, it might be advantageous to offset this gain (and the tax payable) by selling a share that has an unrealised loss,” says Viola.

He adds that this should be a position that you have lost conviction in, after all, “selling good quality long-term investments just for tax reasons is not a sound strategy”.

Viola shares the example of an asset with a $15,000 capital gain which has been held for less than 12 months (so the 50% capital gains tax discount doesn’t apply). It also assumes no deductions and is ex-Medicare levy.

If you were likely to have multiple capital gains events from the sales, you may also want to consider a split over financial years to avoid pushing you up brackets.

Robertson shares an example of selling $200,000 of shares held for less than 12 months with an assessable gain of $100,000. The below table lays out three scenarios: selling it all now, selling it all post 30 June, or selling half now and half next year. (This assumes this sale represents your total income for simplicity’s sake).

(scroll right to view all columns in the table)

In this scenario, it’s not as simple as just waiting for the tax changes to take effect to optimise your result.

Final things to keep in mind

Juggling investments and tax-related decisions can be complicated – it can be valuable to seek out expert advice to ensure the right solution for your needs. Robertson points out there is also a Government calculator to help you start your research, which you can visit here. 

Aside from that, there are a few words of wisdom from Viola and Robertson.

Viola reminds investors to think of the bigger picture – this shouldn’t be about trying to get one over the tax man but determining the method of managing your existing investment plans.

“Be careful not to perform a “wash sale” – selling a share to crystallise a loss for the tax benefit prior to EOFY and then repurchasing the same share in the new FY. The ATO take a very dim view on this, and it can have punitive consequences,” says Viola.

For those thinking about selling the underperformers with a capital loss, Robertson reminds that losses can be carried forward against future capital gains in future financial years, unlike capital gains which must be paid in the year they are incurred.

“Selling for a capital loss to have on your books could offset the sale of shares with a capital gain in future years. So, don’t disregard the poor performing shares all together, as there may be a small pot at the end of the rainbow,” says Robertson.

At the end of the day, having the right information on hand can help you with your investment decisions – so keep up to date with changes and what is happening in your portfolio, and seek expert help if you need it.

Happy investing!