TAX NEWS - June 2010

Tax gains from bad apples: reduce your tax bill

For some investors, tax-loss selling may be the silver lining on the sharemarket's multi-billion-dollar losses since April, but it will depend on when they bought the stock.

Tax-loss selling involves selling a stock that has lost investors money through the course of the financial year to trigger a capital loss to offset capital gains elsewhere.

The benefit to investors is that they can reduce their tax liability by ridding their portfolios of poorly performing companies.

The Australian Taxation Office allows losses to be brought forward, so stocks sold at a big loss during the global financial crisis in 2008-09 can be used to reduce this year's tax bill.

There will be fewer opportunities for tax-loss selling this financial year, though, as the sharemarket has recovered from its lows during the downturn.

Wilson HTM Investment Group institutional adviser Simon Robinson says even with the recent sharemarket falls it is unlikely that a stock purchased close to the beginning of this financial year would be trading significantly lower today.

"A number of the stocks that have had recent downgrades are back to their levels of June 2009 and, accordingly, there is not a great advantage [in] tax-loss selling," he says.

"However, if [bought] during the year when we saw a significant re-rating in a number of those stocks from June 2009, there could be an advantage to doing the selling."

He says stocks bought about March this year may provide a better opportunity to consider it but warns that investors should first weigh the benefits of holding on to the stock.

"In forming a tax-loss selling strategy, always consider where you think the stock will be within the 12-month period of your acquisition price," Robinson says.

"Because if you formulate the view that there could be an aggressive re-rating, you don't want to miss the benefits of holding it for 12 months."

Selling a stock after a year entitles the investor to a 50 per cent capital gains tax discount, which may produce a better tax outcome than tax-loss selling.

For anyone considering it, HLB Mann Judd partner Peter Bembrick warns it is illegal to sell a stock to realise a loss for tax purposes, then immediately buy it back.

The practice allows investors to trigger a capital loss without losing the asset or changing their portfolio.

It is called washing and is a form of tax avoidance. "If you take the extreme approach of doing it on the same day or doing it even the next day, the ATO is going to suggest that [it is] not happy with that approach," Bembrick says.

"But if you are just talking about sitting on losses and realising them in order to get the losses without actually then doing anything else, then that would be no problem at all."

Elio D'Amato, chief executive of fund manager Lincoln Indicators, says while investors should never buy or sell a share solely for tax purposes, now may be a good time to rid their portfolios of companies that do not seem to have bright prospects.

Some of the stocks he thinks may be worth considering for tax-loss selling include Bluescope Steel and Virgin Blue Holdings. "Bluescope is experiencing headwinds with regards to lower global steel demand and higher iron ore prices," he says.

"The short-term situation Bluescope may encounter appears challenging and the company's share price could weaken further."

For Virgin, D'Amato says: "With a restructure seemingly inevitable and with the continued challenging conditions for the aviation industry, it looks as if Virgin Blue's turnaround could still be some time away."

Aviva Investors investment manager John Guadagnuolo also has identified some stocks that could continue to perform poorly.

Included in the list are Gunns, Energy Resources Australia and Nufarm.

"If you have some losses on these companies, we don't really see their share prices recovering anytime soon for various reasons," Guadagnuolo says.

"So therefore the value you can get out of them is to offset any gains you might have."

For Gunns, he says: "Gunns' share price has fallen by over half so far this financial year and, while it has recovered somewhat recently, the outlook for its business looks bleak, with high debt levels, management and board uncertainty, and the future of its controversial pulp mill looking even less certain than ever."

Guadagnuolo sees little prospect of a sustained recovery for uranium miner Energy Resources Australia given the effect of the resource super-profits tax.

"Further, we think the market has overestimated the scarcity of uranium, while advances in reactor technology will limit demand as reprocessing becomes increasingly effective, with the added benefit of limiting the proliferation of nuclear materials," he says.

For chemical company Nufarm, he says the stock has lost about one-third of its value this year and seems unlikely to rebound soon.

"Its key product, glyphosate, is now mass-produced in China, flooding the market with spare supply and dramatically lowering its price," Guadagnuolo says.

"Further, increasing uncertainty around the commitment of its managing director and his large ownership of the stock remains."



PRIME CANDIDATE FOR TAX LOSS SELLING

Virgin Blue (VBA): Up 12.78 per cent since June 30 but down 62.5 per cent from its high in March this year.

Bluescope Steel (BSL): Down 14.23 per cent since June 30.

Gunns (GNS): Down 58 per cent since June 30.

Energy Resources of Australia (ERA): Down 43 per cent since June 30.

Nufarm (NUF): Down 32.5 per cent since June 30.