You should be careful that you don’t let emotions lead you into making a big mistake.
The post Want to pay less tax? Or make more money? appeared first on The Motley Fool Australia. –
Australians love to get one back on the taxman.
âFair enoughâ some of you might be thinking â it feels like we pay a lot, each payday, and itâs tempting to think we donât get enough for our money.
Put me down as a happy taxpayer, though â I reckon we have a lot to be thankful for, and while Iâm sure our countryâs (and statesâ and councilsâ) administration could be cheaper and more effective, weâre the envy of most countries.
Which doesnât mean, as Kerry Packer famously said, I want to âdonate extraâ â I just reckon our tax bills are a pretty fair trade-off for the life we get to enjoy.
Which take us to one of Australiaâs favourite âsportsâ â tax minimisation.
Now, to be clear âminimisationâ is legal. Itâs âavoidanceâ thatâll get you in trouble.
And itâs spawned a whole mini-industry.
Not for nothing do I reckon most Aussies ask their accountants not âHow can I make more moneyâ, but rather âHow can I pay less taxâ.
And it turns out â who knew? – that negatively gearing investment properties is pretty popular as a result.
I knowâ¦ you could knock me down with a feather.
I have my views on property, you might be surprised to know, but thatâs not what I want to cover, today.
Instead, I want to turn my sights to another tax-saving standby: tax-loss selling.
Now, at this point, I should make sure you know that Iâm not a tax accountant (or any sort of accountant), so rule number one is always âcheck with yoursâ, including in relation to what Iâm about to say! And now, to quote Kermit, on with the show!
Tax-loss selling is something that can meaningfully impact your financial position and your tax bill.
Hereâs how it works.
Letâs say youâve sold some shares for a profit â a capital gain.
And you have some other shares that havenât done so well, (something many of us are all-too familiar with, lately), and theyâre currently trading for less than you paid for them.
If you sell them, you end up with the opposite of a capital gain â a âcapital lossâ.
And for most people (reminder: ask your accountant!), you can use that capital loss to partially or fully offset other capital gains.
And, all else being equal, a lower overall gain will mean less tax to pay.
Sounds good, right?
So, at this time of year, many pundits will be suggesting you engage in a little âtax loss sellingâ — selling some of your loss-making shares — to lower your tax bill.
Mark that down for a win by the little guy over the ATO.
Butâ¦ not so fast, kemo sabe.
No, Iâm not going to suggest you should voluntarily donate extra.
Instead, Iâm going to ask you to reflect on that capital loss.
See. right now, youâre down.
You paid $10 per share, and theyâre trading at $7.50.
Youâve lost money.
Plus, thereâs no small emotional toll every time you open your brokerage account, only to be reminded of that loss.
So I get the temptation.
Clean slate. Tax loss. Happy camper.
And in some cases, that will be the right strategy.
Unless those $7.50 shares are worth $20 in five yearsâ time.
In that case, your tax âsavingâ turns out to be pretty expensive.
Oh, sure you saved a buck in tax, but you might have cost yourself $10 or $12 in profits in the process.
I think they call that a pyrrhic victory?
Personally, Iâd rather pay a little more tax in a couple of yearsâ time, if I can bank a multiple of my current ‘loss’, in future profits.
Now, of course, those $7.50 shares could be worth $5 â or even $7.50 â in five yearsâ time.
So Iâm not saying donât ever sell your losers.
But what I am saying is that you should be careful that you donât let emotions (and/or the quest to stick it to the man) lead you into making a big mistake.
And thatâs especially the risk right now, when the whole market is down.
See, youâll remember me saying that the ASX has always â always â got back to, then gone higher than, previous highs after a fall. And while I canât promise that history will repeat, I think itâs likely.
So when the whole market is down, dragging some (most?) of our companies down with it, a reversal of the marketâs fortunes might just be a reversal of fortunes for our portfolios, too.
So sure, take the tax losses that make sense: the ones that represent investment mistakes that arenât likely to be rectified by the passing of time.
But be careful of those losses that, with time, might become gainsâ¦ perhaps large ones.
You really donât want to be watching a recovery go higher, with only a tax-loss sale to comfort you.
(And if youâre someone whoâs planning to just âbuy back in laterâ, be careful. Everyone thinks theyâll do it, but few actually do. And also, if the ATO takes the view that youâre doing it just for the tax saving â they might call it âtax avoidanceâ â you might be in for some tough questionsâ¦ and lifeâs too short to spent time and money dealing with a grumpy ATO!)
Yes, itâs hard to go past a tax saving.
And yes, itâs hard to be patient, giving up a little bit, today, for the chance of a lot more, tomorrow.
But thatâs investing, really.
Which maybe is the point.
When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for over ten years has provided thousands of paying members with stock picks that have doubled, tripled or even more.* Scott just revealed what he believes could be the “five best ASX stocks” for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now
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*Returns as of January 12th 2022
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Motley Fool contributor Scott Phillips has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.