It’s nearly June, so S&P/ASX 200 Index (ASX: XJO) investors should start considering their tax affairs for FY20. Given death and taxes are the only certainties in life, it’s worth considering them. A tax outcome should rarely, if ever, dictate your investment decisions, but paying the right amount of tax can add thousands to your wealth over time.
Here are a few things that you can do to prepare for tax time and ensure that you are paying the right amount.
Sell some investments
There are a million reasons to sell an investment, but the main ones should be because your thesis is broken or your portfolio allocations need adjusting. I’ve only ever sold a few investments, but Telstra Corporation Ltd (ASX: TLS) was one of them, because my thesis was broken.
Many investors will have heard of capital gains tax (CGT) loss selling. This is where you sell an investment at a capital loss, because you want to use the capital loss now or in the future. If you know that you are going to have a capital gain on other investments in FY20, it may be possible to reduce these gains from carried forward capital losses or capital losses you make in the same year. Be careful when you do this, however, as there are tax avoidance rules about selling and buying back the same shares. As always, you shouldn’t do this just for tax reasons.
Less investors will have thought about CGT gains selling. If you have been thinking about selling some of your investments that are in a gain position, before 30 June may be the time to do it. With COVID-19 impacting many people’s livelihood, taking profits may be a good idea if you are going to be in a lower margin tax rate than normal.
Speak to your trusted business advisor
Like investing, tax planning is based on your personal circumstances. If you don’t want to read through pages of the ATO website and legislation, your registered tax agent and accountant will be best positioned to understand your financial position and what is available to you. You should speak to them about the above and any other options available to you.
Tax shouldn’t be what drives your investment decisions, but it should be a consideration. ASX investors should target outperforming the ASX 200 index return, after fees and taxes. Legally lowering your average lifetime tax rate can significantly increase your annualised growth rate and wealth over time.
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Motley Fool contributor Lloyd Prout has no position in any of the stocks mentioned and expresses his own opinions. The Motley Fool Australia owns shares of and has recommended Telstra Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.