Say What Wednesdays

The tax implications of investing in shares; owning, holding, selling, dividends

Welcome to Finance & Fury’s ‘Say What Wednesday’! Today’s question is from John;

  1. What are the tax implications of investing in shares, owning, holding, selling, dividends etc, does this vary to ETF, LIC etc?
  2. Is tax payable on the change in value year on year, or only when a profit or loss is realised?
  3. And does this change if they are held in a company or trust?

We’ll take a look at:

  1. Types of taxes
  2. Structures – Managed Funds, Shares, LICs and ETF

Two types of taxes

  1. Income Tax – and Franking Credits depending on the investment
    • Franking Credits (FC) – helps avoid a double taxation. Tax is paid at company level and then calculated alongside your personal tax to ensure tax isn’t being paid twice and that you’re paying tax on that income at your marginal tax rate rather than the company tax rate.
  2. Capital Gains tax

Income Tax

Companies – Shares/LICS – Same thing really

  1. Shares/LICs pay dividends – the board sets the FC levels
  2. Shares – vary regarding dividends and franking credits
  3. LICs – Typically set a dividend and have FC attached

ETFs – work a little differently to Shares/LICs

  1. Australia – Franking credits are attached in most cases but are a flow through from the underlying shares
    • Not going to be 100% Fully Franked
  2. International – International shares which get withholding tax taken out overseas
    • 30% for US ETFs – can claim back 15% withholding tax from overseas income
  3. Capital Gains – ETFs as a trust – They don’t pay any tax – it flows through
    • If they sell a share for a profit you pay the CGT – you do get the 50% discount though

Managed Funds

  1. Income from managed funds are called distributions – made up of:
    • Dividends – As normal – Underlying companies pay dividend then this passed on
    • Franking Credits – offsets the income and comes from underlying shares
      • Small cap managers might not have any FC if underlying companies don’t
    • Capital gains realised – Either non-discounted (<12 months) or discounted (>12 months)
  2. A highly active manager or geared fund can pay out large chunks of capital gains in a year if realised
    • I’ve had a geared fund make 70% in a year in realised gains – and got a big tax bill ☹

What is best for tax efficiency?

  1. Typically Shares – Fully franked dividends
  2. Then the next most efficient are ETFs – Low portfolio turnover or passive/index and not as much capital gains tax paid out. Can have lower FF dividends compared to blue chip shares
  3. Lastly, managed funds – Typically higher tax payable due to distributions of capital gains

Reinvestment plans of Dividends

  1. Even if you don’t get the income it is still treated as taxable income
  2. Reinvest $1,000 of Dividends – you still have to pay the tax on it as if you received it

Capital Gains

(The difference between the price bought and the price sold)

  1. ETFs/Managed funds – At a listed unit price – Net asset value – Sum of all shares
  2. Shares Shares/LICs are at a price per share sold vs bought
  3. ETFs – AS it is priced – same in gains
  4. Managed Funds – CGT is still possible when you choose to sell it but typically lower CGT – They pay CGT out to you along the way and you bear the pain along the way

Tax environment – Depends on how they are held

  1. Personally – Marginal Tax rates
  2. Trust – Distributed
  3. Company – Best to not – you don’t get a CGT discount

We went through a lot of information today – if you have any questions or want me to clarify things further please do get in touch. Head to https://financeandfury.com.au/contact/

Looking at the factors behind the AUD/USD exchange rate movements

Welcome to Finance and Fury. Last Monday – talked about exchange rate basics Summary - There are a number of factors that go into analysis of the fundamental health of economies and the implications for currency movements – and in turn these can affect the exchange...

What is the relationship between the money supply and nominal GDP growth?

Welcome to Finance and Fury, the Furious Friday edition. In today’s episode I want to explore the effect of monetary inflation (in other words the increase in the money supply) on GDP growth Covered GO compared to GDP in Wednesdays episode this week - To go one step...

Is the economy back to the 1970s?

Welcome to Finance and Fury. In this episode, we will be looking at the economy of the 1970s – looking at the share market correction that occurred and what contributed to this – the aim of this episode is to see if will we experience the same sort of market...

The freedom in financial freedom

Welcome to Finance and Fury. What does your future have in store for you? It is hard to say exactly – so instead, what does your ideal future look like? You might be thinking about next year, the year after that, or 20 to 40 years in the future – Let’s say that in...

How does the adaptability of humanity open the door to Global Economic control?

Welcome to Finance and Fury, The Furious Friday edition   Today we start discussing the SDGs in relation to The economy – few SDGs this relates to Go through each in detail in separate episodes – but this ep is an overview into how deep this goes. UN goals as...

Coffee, dominos and the basics when understanding how the real economy functions

Welcome to Finance and Fury. Today - Understanding domino effects within an economy – This episode is aimed to help think more about orders of effect and consequences from actions – Talked about this in last FF ep – this episode is a bit of a lighter episode – been...

Furious Fridays: The price of free is freedom – Taking a look at Lenin’s reign of terror

Furious Fridays The price of free is freedom: Taking a look at Lenin's reign of terror Today we’re going to run through the very first implementation of Communism on a mass scale. Our last few Furious Friday episodes are a lead up to this. If you didn’t catch those...

Say What Wednesdays: Petrol Prices are going up – why this is and what to do about it!

Say What Wednesdays Petrol Prices are going up – why this is and what to do about it! Australian motorists are suffering the biggest annual increase in petrol prices in 9.5 years as global factors combine to slug drivers at the bowser. ACCC - 2017-2018 financial year...

Should I switch my investments from High Growth to Conservative and why store gold personally instead of a vault?

Welcome to Finance and Fury, the Say What Wednesday Edition Back to answering individual questions - Two questions this week – follow up to recent episodes on gold and economy First from Mario – just a quick one - I listened to a recent podcast you made about gold and...

Goals for the New Year

Welcome to Finance and Fury Welcome to the new year, depending on when you listen it may be new year’s eve or the new year  Hope you are in for a good night, or not recovering from one. Starting off with a question; looking back on the year, are you in a better...

Pin It on Pinterest

Share This