Monday 24 December 2007

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

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