The Tax Planning Benefits of Investing in Stocks

Over time I've come to the conclusion that I'm not the next Warren Buffet, and given the amount of time I spend "researching" my stock picks I'd probably get better returns over time from my investments in low-fee index funds rather than my portfolio of individual stock picks. However, one significant benefit of investing directly in a diversified collections of stock remains -- tax planning. For example, this year my wife is working part-time and is entitled to some Family Tax Benefit payments from the government, provided our overall taxable income isn't too high. I'm salary sacrificing a large amount of pre-tax salary into my superannuation account this year, so our combined taxable income will be below the threshold provided I don't realise too much capital gains from selling some of my stock holdings this financial year.

At the same time, the Australian stock market is looking a bit choppy, so I would like to sell off some of my stock holdings and use the proceeds to reduce the level of gearing I have via my margin loans. By being able to pick and choose which stocks I sell I can control how much capital gain I realise this year. For example, I recently took up my entitlement to 124,000 IPE options at $1.00. Since then they have paid out a dividend of around 5c per share, and, combined with the overall market correction, they are now down to around $0.91. If I sell off these shares I realise a capital loss of around $11,000 which I can use to offset capital gains realised from selling off some other shares that I have owned for a longer period and have gone up considerably in price since I bought them. That way I can realise some cash to reduce my overall margin loan gearing levels without increasing my taxable income this financial year.

If I later decide that I want to reinvest in IPE for the long term, I can always buy back in to IPE at a later date. Given the global credit concerns I may even be able to buy them in a few months time for less than I've sold them for - they currently appear to be in a bit of a down-trend compared to the overall market:



Copyright Enough Wealth 2007