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4 ways to improve your portfolio before fiscal 2020

Anthony Fensom  |  17 Jun 2019Text size  Decrease  Increase  |  
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Make the most of another financial year-end with these top tips on reviewing your investment portfolio, including avoiding the ATO's wash sale crackdown.

The end of the tax year is an ideal time to review your investment portfolio, but there are traps for the unwary – particularly the “wash sale” rule, which can trip up investors wishing to purge poor investments.

"It’s important to enter into any transaction not based on the taxation consequences, but whether it’s a good investment decision," says Brad Hoffman, associate principal at Virtu Super.

"However, if you’re sitting on net realised capital gains throughout the course of the financial year and certain shares have underperformed, then you could choose to realise some of those losses to offset some of the capital gains."

Under the tax rules, unused losses can be carried forward to offset capital gains in future years, without a time limit on how long they can be carried forward.

Notably, if the investment is held for more than a year, the investor is taxed only on half the capital gain.

Such "tax loss selling" appears to be a feature of the Australian bourse, with institutional investors sometimes selling for tax purposes as early as mid-May, while individual investors more commonly wait until June.

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The worst performers in the S&P/ASX200 index are potentially vulnerable, including franchise business Retail Food Group (ASX:RFG) and financial services group AMP (ASX:AMP), while illiquid small cap stocks face further pressures.

What is a wash sale?

The Australian Taxation Office has warned against “wash sales” involving the quick sale and subsequent repurchase of the same equities, resulting in effectively no change in the owner’s economic exposure.

Under the anti-avoidance provisions, the ATO can cancel the tax benefit of such a transaction that is deemed to have occurred primarily for tax reasons.

This also applies to off-market share sales and when investors sell shares held in their own name to a family trust or spouse to create a capital loss.

Another measure, the “dividend washing integrity rule,” prevents investors from claiming more than one set of franking credits where they have received a dividend as a result of dividend washing.

Nevertheless, the ATO has no issue with an investor selling shares before financial year-end as part of a portfolio makeover.

Luke Marshall, senior partner – financial advice at MT Wealth, says the year-end period is an opportunity for investors to rebalance portfolios.

“For longer-term investors, it’s a good time to rebalance the portfolio based on your asset allocation strategy. If you do need to reduce your equity exposure, you might as well reduce it by removing some of the worst performing shares.”

Marshall suggests rebalancing the portfolio every six months, “usually at the end of the calendar year and end of financial year,” based on stock and asset allocation limits.

4 year-end portfolio strategies

In addition to examining the impact of capital gains and losses, share investors could also consider other possible strategies before 30 June:

  1. Prepaying interest on investment loans: Prepaying interest on an investment loan for property or shares for a fixed period, such as 12 or 24 months, locks in the interest rate as well as bringing forward the tax deduction to the current financial year.
  2. Investment strategy review: Self-managed super funds are required to review the fund’s investment strategy regularly and doing so every six and 12 months is advisable to ensure its goals and outcomes are still relevant.
  3. Subscribe to share market information services or publications: The cost of purchasing specialist investment journals and other information used to manage a share portfolio can be claimed, including potentially a Morningstar subscription.
  4. Other allowable deductions from dividend income: According to the ATO, other allowable expenses include the cost of travel to attend a company’s annual general meeting or consult with a broker, as well as the cost of internet access in managing the portfolio, while there is also the tax benefit of franked dividends.

Investors seeking to sell some shares could also consider making a philanthropic donation.

ShareGift Australia offers shareholders the opportunity to sell shares and donate the proceeds to charity, without having to pay brokerage, although investors could still be liable for capital gains tax arising from the sale.

is a Morningstar contributor.

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