Australians love to get one back on the taxman.
'Fair enough' some of you might be thinking – it feels like we pay a lot, each payday, and it's tempting to think we don't get enough for our money.
Put me down as a happy taxpayer, though – I reckon we have a lot to be thankful for, and while I'm sure our country's (and states' and councils') administration could be cheaper and more effective, we're the envy of most countries.
Which doesn't mean, as Kerry Packer famously said, I want to 'donate extra' – I just reckon our tax bills are a pretty fair trade-off for the life we get to enjoy.
Which take us to one of Australia's favourite 'sports' – tax minimisation.
Now, to be clear 'minimisation' is legal. It's 'avoidance' that'll get you in trouble.
And it's spawned a whole mini-industry.
Not for nothing do I reckon most Aussies ask their accountants not 'How can I make more money', but rather 'How can I pay less tax'.
And it turns out – who knew? – that negatively gearing investment properties is pretty popular as a result.
I know… you could knock me down with a feather.
I have my views on property, you might be surprised to know, but that's not what I want to cover, today.
Instead, I want to turn my sights to another tax-saving standby: tax-loss selling.
Now, at this point, I should make sure you know that I'm not a tax accountant (or any sort of accountant), so rule number one is always 'check with yours', including in relation to what I'm about to say! And now, to quote Kermit, on with the show!
Tax-loss selling is something that can meaningfully impact your financial position and your tax bill.
Here's how it works.
Let's say you've sold some shares for a profit – a capital gain.
And you have some other shares that haven't done so well, (something many of us are all-too familiar with, lately), and they're currently trading for less than you paid for them.
If you sell them, you end up with the opposite of a capital gain – a 'capital loss'.
And for most people (reminder: ask your accountant!), you can use that capital loss to partially or fully offset other capital gains.
And, all else being equal, a lower overall gain will mean less tax to pay.
Sounds good, right?
So, at this time of year, many pundits will be suggesting you engage in a little 'tax loss selling' — selling some of your loss-making shares — to lower your tax bill.
Mark that down for a win by the little guy over the ATO.
But… not so fast, kemo sabe.
No, I'm not going to suggest you should voluntarily donate extra.
Instead, I'm going to ask you to reflect on that capital loss.
See. right now, you're down.
You paid $10 per share, and they're trading at $7.50.
You've lost money.
Plus, there's no small emotional toll every time you open your brokerage account, only to be reminded of that loss.
So I get the temptation.
Clean slate. Tax loss. Happy camper.
And in some cases, that will be the right strategy.
Unless…
Unless those $7.50 shares are worth $20 in five years' time.
In that case, your tax 'saving' turns out to be pretty expensive.
Oh, sure you saved a buck in tax, but you might have cost yourself $10 or $12 in profits in the process.
I think they call that a pyrrhic victory?
Personally, I'd rather pay a little more tax in a couple of years' time, if I can bank a multiple of my current 'loss', in future profits.
Wouldn't you?
Now, of course, those $7.50 shares could be worth $5 – or even $7.50 – in five years' time.
So I'm not saying don't ever sell your losers.
But what I am saying is that you should be careful that you don't let emotions (and/or the quest to stick it to the man) lead you into making a big mistake.
And that's especially the risk right now, when the whole market is down.
See, you'll remember me saying that the ASX has always – always – got back to, then gone higher than, previous highs after a fall. And while I can't promise that history will repeat, I think it's likely.
So when the whole market is down, dragging some (most?) of our companies down with it, a reversal of the market's fortunes might just be a reversal of fortunes for our portfolios, too.
So sure, take the tax losses that make sense: the ones that represent investment mistakes that aren't likely to be rectified by the passing of time.
But be careful of those losses that, with time, might become gains… perhaps large ones.
You really don't want to be watching a recovery go higher, with only a tax-loss sale to comfort you.
(And if you're someone who's planning to just 'buy back in later', be careful. Everyone thinks they'll do it, but few actually do. And also, if the ATO takes the view that you're doing it just for the tax saving – they might call it 'tax avoidance' – you might be in for some tough questions… and life's too short to spent time and money dealing with a grumpy ATO!)
Yes, it's hard to go past a tax saving.
And yes, it's hard to be patient, giving up a little bit, today, for the chance of a lot more, tomorrow.
But that's investing, really.
Which maybe is the point.
Fool on!
