2011 Stock Market Review
- Thread starter redwing
- Start date
Thanks, that makes sense.
I asked because I'll be in a similar situation with the ATO this year but in my case trading FX
I assume if you are trading FX then you are using CFDs. In which case the ATO has made a ruling that all gains are ordinary income, not capital gains if it's your business.
http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR200515/NAT/ATO/00001
Thanks Aaron
No it isn't CFD'S, I'm trading FX currency pairs but I imagine they will be treated the same way
I doubt the ATO would have a problem classifying yourself as a sharetrader if you are making a profit (better for them). But they usually have a problem when you are making a loss and want to claim it as a deduction
I learnt at university that the ATO's function is to take from the rich and take from the poor.
Hi aaron_c
So the ATO formula is
Profit/2 then less borrowing costs which equals a 10% return in the above example,
not
Profit less borrowing costs/2 which would equal a return of 5%.
Cheers
Pete
Agree with the formula the ATO uses but not the return of 5%.
Assumption:
Borrowed: $100 @ 10%
Profit: 20% over 1 year
Interest: $10
Taxable Amt / Profit: $10 after interest cost
Taxable Amt after CGT discount of 50%: $5
Worst Case Senario
You are in the highest tax bracket 46.5% (incl medicare levy)
Tax to be paid on $5: $2.325
Net Profit: $7.675
Return: 7.675%
Best Case Scenario
You earn less than $6000 per year so do not have to pay any tax.
Tax to be paid on $5: $0*
Net Profit: $10
Return: 10%*
* not sure about Medicare levy in this situation.
So your return will fall between 7.675% and 10% inclusive.
Cheers
Oracle.
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I doubt the ATO would have a problem classifying yourself as a sharetrader if you are making a profit (better for them). But they usually have a problem when you are making a loss and want to claim it as a deduction
I'm sorry but the rules are the rules and they made them up and losses are deductible against income. They may have a problem with that yet I have a problem with paying tax...even stevens. Stock in stock out...simple.
My trading does not need take on a whole myiad of sneaky or suspect transactions so as to solicit any hint of suspicion with the ATO....in fact I would welcome a audit as I fear they just may owe me as I prefer to err on the side of conservatism with the ATO and not greed.....SAN factor so to speak. Work within the rules is all you can do.
But yes...a profit is the aim and if it's taxed then the next objective is to minimise the tax...legally. Neg gearing does that for me just fine. If that is removed from the equation then we'll come up with something else I'm sure. Or we simply pay the tax...no biggie unless I'm the only one pay tax that is...?
have fun !!
Hi Oracle
Thanks for your post, I was using Intrinsic Values example tax rate of 50%.
(post#9).
Whilst I agree with IVs emphasis on after tax returns I always believed the formula was,
Gross Profit - Expenses / by 50%CGT discount= taxable profit.
Whereas using IVs formula of,
Gross Profit/by 50%CGT discount - Expenses = taxable profit.
would give you distorted after tax returns and lead to hefty penalties from
the ATO.
Cheers
Pete
my understanding is one is of an income nature, one is of a capital gains nature.
The capital gains so long as held for 12 months is treated as capital gains, not income, therefore it is offset against 'net income' at the discount rate.
If net income is negative, then the tax effect kicks in.
Consider an investment property, the 'negative gearing' is offset against current income, yet one day when the property is sold CGT applies. Obviously the cost base is reduced (through such things as depreciation), yet the total tax paid will be on the CGT realised amount, not a 'bring back' of income applied 'negative gearing' at marginal rates.
Therefore on a residential property, on the top marginal income tax rate, the 'negative gearing' is offsetting tax at a rate of 50% odd, yet when the property is sold the maximum tax rate will be 25% odd.
PS consult accounting professionals on all of this. I believe i am correct, but do your own research/tax affairs.
The capital gains so long as held for 12 months is treated as capital gains, not income, therefore it is offset against 'net income' at the discount rate.
If net income is negative, then the tax effect kicks in.
Consider an investment property, the 'negative gearing' is offset against current income, yet one day when the property is sold CGT applies. Obviously the cost base is reduced (through such things as depreciation), yet the total tax paid will be on the CGT realised amount, not a 'bring back' of income applied 'negative gearing' at marginal rates.
Therefore on a residential property, on the top marginal income tax rate, the 'negative gearing' is offsetting tax at a rate of 50% odd, yet when the property is sold the maximum tax rate will be 25% odd.
PS consult accounting professionals on all of this. I believe i am correct, but do your own research/tax affairs.
let me give another example from times past.
Historically when i went to the tax agent for the tax return, the basic questions:
How much wages (income)
How much dividends (income + franking)
Borrowings used to invest: interest on borrowings = interest expense.
Any capital gains from realised transactions= discounted CGT if held longer than 12 months.
First three questions were income orientated.
Last question, CGT at the discounted rate, but calculated with reference to the 'net income' derived with regards to the first three questions.
Historically when i went to the tax agent for the tax return, the basic questions:
How much wages (income)
How much dividends (income + franking)
Borrowings used to invest: interest on borrowings = interest expense.
Any capital gains from realised transactions= discounted CGT if held longer than 12 months.
First three questions were income orientated.
Last question, CGT at the discounted rate, but calculated with reference to the 'net income' derived with regards to the first three questions.
Yes, there is an asymetry there that expenses are deducted at the full rate and CGT at the 50% rate for holding periods over 1 year.
This is offset by inflation in the case of property where frictional costs encourage holding periods over 5 years.
The current tax regime to me really favours shares, paid for with a loan, holding period 1 year and one day. You get to deduct all the interest cost, there are minimal frictional costs with shares (or equivalent) and if you hold for the mimimum period for the CGT discount (1-2 years), your return does not get eroded by inflation (much). The average holding period for shares is below 5 years in any case.
For a longer holding share holding or property (eg 15 years), you may get slapped with tax selling at year 5 (which you otherwise could compound by not selling) BUT you get slapped with tax on inflation at 15 years (albeit at 50% but that is still a 50% tax on inflation). That's what I concluded using a very crude spreadsheet with different variables(someone correct me if I am wrong). The benefit from keeping prperty 5 vs 15 years is the frictional cost reduction not the benefit from deferring tax as this appears to be eroded by inflation (unless inflation is very low or your compounding rate is very high above inflation). There seems to be no benefit for me of holding shares 1 yr vs 15 yrs from a tax deferral POV.
NB. I am not an accountant, so of course seek advice from your accountant about tax issues.
*** on a complete tangeant, I'm surprised by the strength of the AUD recently. Couldn't resist a smallish qty of USD, which is in cash waiting for a correction there. Also interesting news with QBE.
This is offset by inflation in the case of property where frictional costs encourage holding periods over 5 years.
The current tax regime to me really favours shares, paid for with a loan, holding period 1 year and one day. You get to deduct all the interest cost, there are minimal frictional costs with shares (or equivalent) and if you hold for the mimimum period for the CGT discount (1-2 years), your return does not get eroded by inflation (much). The average holding period for shares is below 5 years in any case.
For a longer holding share holding or property (eg 15 years), you may get slapped with tax selling at year 5 (which you otherwise could compound by not selling) BUT you get slapped with tax on inflation at 15 years (albeit at 50% but that is still a 50% tax on inflation). That's what I concluded using a very crude spreadsheet with different variables(someone correct me if I am wrong). The benefit from keeping prperty 5 vs 15 years is the frictional cost reduction not the benefit from deferring tax as this appears to be eroded by inflation (unless inflation is very low or your compounding rate is very high above inflation). There seems to be no benefit for me of holding shares 1 yr vs 15 yrs from a tax deferral POV.
NB. I am not an accountant, so of course seek advice from your accountant about tax issues.
*** on a complete tangeant, I'm surprised by the strength of the AUD recently. Couldn't resist a smallish qty of USD, which is in cash waiting for a correction there. Also interesting news with QBE.
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i have also recently increased exposure to the US. Still only relatively minor weighting (15%).
I acknowledge dentos demographic forecasts, but i really cant see the US market seriously crashing.
A 20% correction, yes its definately possible, but another serious crash down to say Dow Jones of 6000 or lower, i think its very very improbable.
Unlike the Australian market, there are so many more quality US companies that have sufficient economic moats that they can lift earnings in the medium term.
But the australian market is much cheaper than the US market (this is a general comment, i am not interested in market wide PE comparisons, given the high proportion of australian shares that are cyclical in nature)
So what do i go for????? (especially as with the Australian market i get franking credits, not so with overseas markets). In a low return environment, franking credits can make a seriious impact on total investor returns.
Against this is the axiom that should apply to both traders and investors: do more of that which works and less of that which doesnt. At the moment my fundamental investing is working for US shares, i am making a profit. Whilst i have made very good returns over the life of my Australian share investing, the last 12 months have shown a loss.
And i dont like losses, in the words of Gorden Gecko, nothing ruins my day more than losses.
While I agree that losses are painful but one thing I do keep in mind at all times is my own valuation of a business.
If I hold company XYZ which was earning A amount of dollars and suddenly the price falls by 10-20% even though it has increased it's earnings and future is still bright I wouldn't be too concerned by the price drop and the losses to my acct. I would be actually considering to top up.
Sharemarket is no different to shopping in general. You go shopping when the best sales are on. Only thing is you need to know the difference between a fake sale and a genuine sale. Which comes from experience and knowledge.
Cheers,
Oracle.
It is a loss when the intrinsic value has also fallen during the year.
My favourite situation is when a share price declines (hence the market views this as a loss), yet intrinsic value is still rising. But there are not many opportunities like this in australia (but there are in the US).
For the Australian market it has been more of a situation that intrinsic value is dropping, but share prices have been declining much more.
So the essential question becomes: are intrinsic values going to stabalise now, or is the continued downturn in share prices are precluder for intrinsic value to decline significantly further (ie value traps)
My favourite situation is when a share price declines (hence the market views this as a loss), yet intrinsic value is still rising. But there are not many opportunities like this in australia (but there are in the US).
For the Australian market it has been more of a situation that intrinsic value is dropping, but share prices have been declining much more.
So the essential question becomes: are intrinsic values going to stabalise now, or is the continued downturn in share prices are precluder for intrinsic value to decline significantly further (ie value traps)
That would depend on the listed asx company,if the euro goes into the gutter and the who's to blame stage as i think it will,then there wil be no fixed value on everything,and now that France is being downgraded then it's only a matter of time,if it does happen the US dollar will make a comeback in a big way..imho..
Buffett theory works best when intrinsic values are rising. Buffett quips only work well in conjuction with the type of companies he buys. To many people extrapolate Buffett quips into the broader market, with dangerous ramifications in my opinion.
Where future intrinsic value is more uncertain, Buffett likes to take debt with equity upside potential. Look at his investments in GE/Goldman Sachs during the GFC. Look at his recent investment in Bank of America.
The most recent: Bank of America he gets preference shares (which rank above ordinary shares), but with a decent income coupon (where as the ordinary shares dont at the moment), in 5 odd years he can get his capital back in the event that BAC is not performing adequately, but at the same time he also gets long term options so he can acquire BAC shares at the current low price if things turn around.
Where future intrinsic value is more uncertain, Buffett likes to take debt with equity upside potential. Look at his investments in GE/Goldman Sachs during the GFC. Look at his recent investment in Bank of America.
The most recent: Bank of America he gets preference shares (which rank above ordinary shares), but with a decent income coupon (where as the ordinary shares dont at the moment), in 5 odd years he can get his capital back in the event that BAC is not performing adequately, but at the same time he also gets long term options so he can acquire BAC shares at the current low price if things turn around.
It is mathematically impossible for Buffett to have amassed his wealth using Buffett principles. He does off-market deals and buys enough of a company to influence it's board. He has never written a book so everyone is guessing about his style anyway.
I can't think of a worse person to try to emulate.
Follow your own dreams and develop your own style.
I can't think of a worse person to try to emulate.
Follow your own dreams and develop your own style.
