‘Tis The Time For Tax Selling

Array
(
    [0] => Array
        (
            [0] => ((GMG))
            [1] => ((SEK))
            [2] => ((CGF))
            [3] => ((CEY))
            [4] => ((ERA))
            [5] => ((NUF))
            [6] => ((AWE))
            [7] => ((PDN))
            [8] => ((PRY))
        )

    [1] => Array
        (
            [0] => GMG
            [1] => SEK
            [2] => CGF
            [3] => CEY
            [4] => ERA
            [5] => NUF
            [6] => AWE
            [7] => PDN
            [8] => PRY
        )

)

This story features GOODMAN GROUP, and other companies.
For more info SHARE ANALYSIS: GMG
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

The ASX 200 closed on June 30, 2009 at 3954. Yesterday it closed at 4379 for an FY10 gain to date of 11%. While it's a bit difficult to know for sure what the close on June 30, 2010 will look like right now, suffice to say that any capital gains will have investors thinking about capital gains tax.

Or more specifically, thinking about capital losses. Capital gains on stock trading is paid at the marginal income tax rate but only when crystallised, and discounts apply for positions held for greater than one year. Similarly, capital losses can be offset against gains in the year, and net losses can be carried forward.

The ideal outcome for an investor is that stock prices rise in value over time. If you then sell and pay tax well…no one ever went broke paying too much tax. Clearly there is an incentive to hold winning positions into a second or further year given the tax rate is discounted by up to 50%. But what if your portfolio includes stocks you bought this year that are down in value? If you don't like them, sell them, but if you still want to hang on to them then you may be able to pull a little (legal) swifty.

You can sell those stocks and capture the full tax offset, then repurchase on July 1 or thereabouts and play again. If you then end up holding for a profit more than a year hence, you'll only pay half the tax. So there is a potential to gross up ultimate net winnings if everything goes to plan.

The ASX 200 index may only return around 10% or so, but within its make-up are groups of stocks which have either greatly outperformed or greatly underperformed the market. You would not want to sell out of the winners too early and pay full tax, so you'd hold those. But you would want to sell out of the real dogs and take as much tax loss as possible for use at a future date, even if you buy those dogs back again in FY11.

Macquarie has done some back-testing on tax loss selling in has found such strategies historically profitable. So either consider doing the same yourself, or be warned that others will be doing it. Big FY10 winners will be immune but big FY10 losers may well become even bigger losers in the rush to sell before June 30.

Macquarie points out that the big winners of FY10 to date include Goodman Group ((GMG)), Seek ((SEK)), Challenger Financial ((CGF)) and Centennial Coal ((CEY)).

Big losers include Energy Resources of Australia ((ERA)), Nufarm ((NUF)), Australian Worldwide Exploration ((AWE)), Paladin Energy ((PDN)) and Primary Health Care ((PRY)).

But all an investor need do is compare June 30, 2009 prices to today's prices for each stock in a portfolio and figure out which ones might be worth selling.

Of course, investors must also be ready for the reverse rush in July, when tax-loss stocks are bought back.

Click to view our Glossary of Financial Terms