4 by next week , page-14

do you consider tax implications when deciding when to "lock in profits"? i'm sure many dont. and im sure some dont even declare CGT?!

i do both, and tax can be prohibitive when selling a share held in your own name within 12 months of buying it (ie: no 50% discount).

[ignoring brokerage in this example here....]

hypothetically, say you bought 20,000 WHE at $1.70 in april 07 for a total cost of $34,000.

if you sold today, you'd realise funds of $3.86 x 20,000 = $77,200.

you'd have made approx $43,200, so add this to your taxable income in 07/08 FY.

say you are in the marginal tax rate of 30%. you may be higher, but definitely not lower once you include the $43,200 taxable gain from 20,000 WHE.

$43,200 x 31.5% (inc 1.5% medicare levy) = $13,608 tax to pay.

and i realise you dont pay tax immediately, and it could be deferred for up to approx 22 months legitimately in some cases (ie: sell july 07, pay tax may 09). BUT STILL:

you are effectively left with $63,592 after tax to "rebuy your 20,000 WHE on weakness" or invest elsewhere. you will need the WHE price to drop to $3.18 if you only wanted to spend your AFTER TAX funds of $63,592. but of course you would probably put the entire $77,200 back into WHE.

now just for the hell of it, what about this scenario. it will depend on your personal cashflow and income, but what if you have little free cashflow, and may 2009 rolls around and you have to pay your additional $13,608 tax at the same time as lodging your tax return (as a trade off for lodging as late as possible in may 09). WHE may have had a rough trot, and could be trading below what you paid for it, and you are forced to sell them again to pay your tax debt because you sold now trying to rebuy on weakness. i mean this in an extreme example, but i'm sure it's happened many times before....

OR

option 2:

you could hold the share for 12 months, and even if it hasn't moved upward at all and still is trading at $3.86, your tax is halved (50% CGT discount), and tax paid will be $6471. as such, TAX SAVED is $6471.

this $6471 saved is the equivalent of about 32.35 cents per share.

of course i dont believe in holding a share for 12 months in every case, but WHE seems the classical example of where the shareprice is likely to be above to $5 come mid-2008 and well above that beyond, so why sell it and TRY (no guarantee you will be able to) to buy it back on weakness. and incur additional tax doing so!

in my example, the shareprice would need to drop to below $3.53 ($3.86 - 32.35 cents per share) before you reduce your costbase and MAKE ANY AFTER TAX GAIN, ie: negate the EXTRA tax you WILL PAY by not holding for 12 months.

you will BREAK EVEN rebuying at $3.53 if you sold WHE shares today at $3.86 in this example.

and you might not even be able to get in at that price! i dont see many sellers, let alone offerring up 20,000 near $3.53 levels..... liquidity issues??

and for the stress of it? and if WHE continues up? it's not worth it.

unless of course you are trading in your own SMSF, where tax is capped at 15% in the first place. im unsure whether superfunds get the 50% CGT discount? i dont think they do? i know companies do not.

this is a topic i'd love to hear discussed more, so please feel free to add your thoughts, etc - if you have any on CGT.

cheers