Tax time tips to help strengthen your portfolio for the year ahead
The period leading up to 30 June presents an excellent opportunity to take profits, cut losses and snap up bargains at a time when the market is undervaluing solid companies, says research house and fund manager Lincoln Indicators.
“As the dust settles on this financial year end, now is an excellent time for retail investors to review their portfolio and understand any tax implications in order to maximise returns going into the new financial year,” said Lincoln’s Chief Executive Officer, Elio D’Amato.
Notwithstanding domestic and global factors – such as tightening monetary and fiscal policies, the resources super profits tax (RSPT), the sovereign debt crisis in Europe and China’s decelerating growth, Lincoln still sees many Australian businesses trading at a discount to their fair value.
“In volatile markets it’s all about being vigilant and staying on top of your share portfolio. Investors should always have caution, not fear, in mind when making investment decisions to guide them through volatile times,” Mr D’Amato said.
“By sticking with companies that are financially healthy and exhibit strong, consistent earnings growth – in good times, and bad – you will outperform the market. You will also, more importantly, reduce the chances of putting hard earned money into financially unhealthy companies such as Clive Peeters Limited (CPR) or Forest Enterprises Australia Limited (FEA).”
For investors rebalancing and reviewing their portfolio, Mr D’Amato says there are a number of tax tips and considerations that the retail investor should be aware of in buying/selling stocks before 30 June.
“When spring cleaning your portfolio, one the most important issues for investors to consider is the capital gains tax (CGT) position. Investors should never buy or sell a share solely for taxation purposes, but tax can matter a lot in the overall portfolio management.”
Lincoln’s top tax tips:
1. Capital gains are assessable when realised and capital losses are only deductible against capital gains, not any other assessable income. With any realised profits from selling shares during the year, investors may be wise to sell some of their portfolio losers, especially those that do not seem to have bright prospects.
2. Selling shares at a loss allows an investor to offset the capital gains realised during the year. Otherwise, capital losses will be carried forward to the next financial year. Capital losses can be carried forward indefinitely.
3. Investors are entitled to a 50 per cent discount on capital gains for assets that have been held for more than 365 days. You may be able to save considerable money by deferring your sale for a few weeks. Of course, the stock may fall in the coming weeks given current volatility exhibited in the market so investors would need to balance the trade-off between CGT savings and the possibility of selling shares at a lower price.
4. Any gains realised on the disposal of assets purchased before 20 September 1985 are not subject to CGT. In other words, they are tax free. By the same token, any losses arise from the sale of those assets cannot be used to offset other capital gains.
5. If money has been borrowed to buy shares, you will be able to deduct the interest incurred, provided it is reasonable to expect that dividends will be generated from the investment.
6. Tax rules are complicated and change all the time and only licensed professionals should be offering advice.
Lincoln’s five stocks to watch
Looking forward to the second half of 2010, Lincoln has identified five ‘stocks to watch’. These stocks are potentially quality, long-term opportunities and currently hold a Lincoln Financial Health rating of ‘Strong’. They are also viewed as undervalued, efficient and growing:
Credit Corp Group Limited (CCP)
CCP is a debt collection and receivables management agency which benefits from any major increase in credit defaults where consumers struggle to pay their credit cards or utility bills. Given its strong debt ledger book and collection track record, CCP has further opportunities to shine in a bearish market.
CSL Limited (CSL)
CSL, the largest and arguably most successful biopharmaceutical company to emerge from Australia, may represent good long-term value. Given a high barrier to entry into the blood plasma market, CSL is currently well positioned in terms of its competition. A weaker Australian dollar and a resurgent US economy should also both deliver better returns for CSL in local dollar terms.
Decmil Group Limited (DCG)
DCG is a multi-faceted engineering company specialising in temporary accommodation villages and civil works. With strong exposure in Western Australia, the company has reaped significant benefits from the state’s mining boom in recent years. Future earnings are supported by existing contracts with major clients like BHP Billiton Limited (BHP), Woodside Petroleum Limited (WPL) and Leighton Holdings Limited (LEI).
Navitas Limited (NVT)
NVT is Australia’s leading private education provider in the tertiary sector and looks set to continue to build on its recent strong growth on the back of overseas expansion. The company’s recent increased global exposure – and its UK expansion in particular – has more than offset sluggish growth in Australia due to a lower number of university and pre-university students coming in from India and China.
Woolworths Limited (WOW)
WOW has proved that it can thrive under almost any circumstances. In good times, people spend more money on luxury goods like the latest HD TVs, and in bad times, they still need bread and butter. Going forward, the company’s foray into the home improvement sector will be a key catalyst for long-term growth.
“Remember that while the market is currently experiencing some volatility, history shows that whenever there has been a down period, a recovery and a new peak has always occurred. Being in quality stocks offers the best opportunity for Australian sharemarket investors to outperform over the longer term. The market will also reward quality, financially sound companies over time, so a new financial year cleanout is a great way to ensure you that you capture those opportunities while good value still exists.” Mr D’Amato said. The best way to choose stocks is to apply Lincoln’s ‘Nine Golden Rules’ for successful investing.”
More information on Lincoln’s methodology can be found at: www.lincolnindicators.com.au
Lincoln is Australia’s leading fundamental analysis research house and fund manager offering intelligent sharemarket solutions for the conscientious investor. Founded in 1984 by Melbourne University academic and Australian Olympian Dr Merv Lincoln, the company’s specialist knowledge is based on Dr Lincoln’s PhD thesis which analysed and derived models to assess the financial health of businesses. The resulting Lincoln methodology combines company health assessment, key accounting ratios and other quantitative and qualitative measures to identify well-managed companies with strong growth prospects. Stock Doctor, the software-based incarnation of Dr Lincoln’s approach, was introduced to Australian investors in 1996 and has proven itself over more than decade of sharemarket conditions.
In 2003 Lincoln established its Managed Investments business to allow investors to experience the company’s distinct investment methodology through a professionally managed portfolio. In 2007 the Lincoln Australian Share Fund was opened to retail investors, with the Fund offering two classes of units: wholesale and retail. The launch of the Lincoln Retail Australian Share Fund has since broadened the reach of Lincoln’s methodology even further. Today, the Fund has grown organically to around A$116 million in funds under management as at 30 April 2010.
For more information visit www.lincolnindicators.com.au or call 1300 676 332.
P: Leanne Henderson, Chief Operating Officer, Lincoln
M: (03) 9854 9444
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