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Tax planning a year-round task

JUDGING by the media coverage and public debate during the past year, the only tax change anybody seems to worry about is the introduction of the GST.

This change has overshadowed a range of other tax initiatives that offer substantial benefits to individual investors

Hartley Poynton’s Graeme Yukich has found that most investors are not aware of recent changes, or the attractive tax planning opportunities they have created.

He recommends that investors work with their advisers to take advantage of the new tax rules on an ongoing basis, instead of leaving tax planning to the end of the financial year.

Mr Yukich says one of the most significant changes is that excess imputation credits will be refunded to individuals and super funds from July 1.

The dividend imputation system, established in the mid 1980s, is designed to stop “double taxation” of company profits. It means that dividends paid out of a company’s after-tax income have imputation credits attached to them. The imputation credits (typically at the corporate tax rate of 34 per cent) can be used to offset the individual investor’s taxable income.

In the past, any excess imputation credits were wasted. But individuals are now entitled to receive a cash refund of any excess credits.

Another area where many individuals are yet to catch up with the latest rules is the treatment of capital gains, Mr Yukich says.

Since September 1999, the tax payable on capital gains on investments held for at least one year has been halved. The maximum tax rate applicable to capital gains is now 24.25 per cent, or half the top marginal tax rate (plus Medicare levy).

The old system of indexing the cost base, so that investors only pay tax on the after-inflation gains, was frozen from September 30 1999. However, with inflation likely to stay around 3-4 per cent or lower, that is not a significant price to pay.

Mr Yukich says individual investors can minimise tax simply by taking full advantage of the prevailing tax rules.

For instance, individuals who borrow money to acquire shares qualify for a tax deduction on the interest expense on their loan.

By acquiring a portfolio of blue chip shares, the dividends generally will be fully franked and therefore partially, or completely, tax free, depending on the individual’s marginal tax rate and other circumstances.

Individuals also should seek to maximise profits in the form of capital gains, so that the profit is taxable at the concessional capital gains rates.

Mr Yukich says a further option for investors wanting to maximise after-tax returns is to participate in off-market share buy-backs.

Buy-backs have become increasingly popular as companies become more active in their capital management. Many buy-backs, such as those undertaken by Commonwealth Bank, Lend Lease, NRMA and Capral Alum-inium, involve a “capital return” to share-holders and a large one-off franked dividend.

The capital return is a portion of the prevailing share price and, depending on the individual’s entry price, has the effect of creating a capital loss for tax purposes.

Mr Yukich says astute traders who acquire shares before a buy-back will be able to get all of their principal back, plus receive imputation credits with the franked dividend, and obtain a capital loss that they can use to offset other capital gains.

The tax benefits will generally be magnified if investors hold shares through a self-managed superannuation fund, Mr Yukich says.

They qualify for the concessional tax treatment of superannuation savings, yet retain flexibility and control over their investments.

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