Even investors who happily pay their tax in recognition that their doing their bit for society and the greater good generally don't really like having to pay more tax than they have to.
Given another financial year has just been and gone, now is exactly the time that investors should be thinking about their optimal investment strategy for the current financial year.
There are two great ways many Australians can maximise their after-tax returns from investing in the sharemarket and both concepts are important to grasp.
Fully franked dividends
Franking credits are a wonderful system which most investors can benefit from. The key here is to pick stocks paying fully franked dividends as this should maximise the tax benefit. Property trusts such as Stockland Corporation Ltd (ASX: SGP) or companies with significant overseas earnings such as CSL Limited (ASX: CSL) are examples of companies that pay dividends without franking credits attached, so they're not much use from this perspective. In contrast companies such as Telstra Corporation Ltd (ASX: TLS) and the major banks, fully frank their dividends.
Long-term capital growth
As shareholders of Ramsay Health Care Limited (ASX: RHC) know, long-term buy-and-hold has seen their shares rise in price by over 700% in the past decade. Investing shouldn't just be about the dividend as the total return you receive is a combination of the dividend plus the change in capital value of your investment. If a shareholding goes up in value and is then sold, investors are said to have realised a capital gain – this attracts a capital gains tax. If however a share price goes up but no sale is made, then no capital gain is realised and the shareholder is not liable for capital gains tax at that time.
What this means is, if an investor can identify stocks with long-term growth potential, there may be no need to sell and replace a stock with a new, higher growth option. This scenario allows an investor to avoid having to realise a capital gain.
The best of both worlds
One way to marry these two tax efficiencies together is to focus on purchasing stocks which firstly pay high fully franked dividends and secondly have appealing long-term growth profiles. For example, Slater & Gordon Limited (ASX: SGH) has consistently paid fully franked dividends since listing and this is unlikely to alter any time soon. The legal firm also has an appealing long-term growth profile thanks to its opportunities to further consolidate its market share both here in Australia and in the UK.
Slater & Gordon – when purchased at the right price is the type of stock which can potentially help investors minimise their tax bill simply by being long-term shareholders.
