As I was busily muttering about the increased cost burden of the Federal Budget’s proposed 30% minimum capital gains tax, I suddenly remembered some wise advice from the world’s best investor, Warren Buffett.
“When we own portions of outstanding businesses with outstanding managements, our favourite holding period is forever,” Buffett said.
“We are just the opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hang on to businesses that disappoint.”
“Peter Lynch aptly likens such behaviour to cutting the flowers and watering the weeds.’’
Remember to Invest Carefully
That quote is a great reminder of a couple of real investing gems that are easily forgotten amid a flurry of urgency around tax changes.
One is to be really careful about what you invest in and make sure it is an appropriate asset to hold for the really long term, if needed.
The second is to think very carefully before disposing of any assets – in other words, keep tending your successful investment garden.
So, rather than rushing to sell all of your investments outside superannuation before the new CGT arrangements arrive in the middle of 2027, it is worth having a close look at the actual investments and whether they stack up for a long period of time.
In other words, check out the garden and make sure you are only selling weeds and not flowers.
Dividend Franking Benefits
It is also worth remembering that the franked dividend arrangements in Australia are highly concessional in tax terms for income from shares and other businesses.
If there is no burning need to cash up in the short term and investments are in great shape for a long term future, what is the sense of being rushed into a sale just because capital gains taxes are rising?
Capital gains taxes only apply when you sell, so with a longer holding period they might only apply when your descendants are finalising your affairs!
Adapting to the New Rules
Having said that, there is no doubt that there needs to be some new thinking for those who had adopted the entirely sensible strategy of keeping assets outside superannuation to be gradually sold down in retirement years when taxable income is low—potentially eliminating or greatly reducing CGT upon sale.
That situation no longer applies given that there will be a new CGT floor of 30% even if your other taxable income is zero.
In this situation while some cashing out before new rates apply might be appropriate, there are other strategies that are also worth considering.
Consider Your Loan Options
While it is not a common practice in Australia, it is possible to gradually draw down a loan secured against shares and also property as an alternative to crystallising hefty taxes with a sale of the asset.
In the case of a property it could be done through the familiar process of an offset account which can be drawn down upon as required or even through a commercial or government reverse mortgage.
For shares, a margin loan can be applied for and drawn down as required often up to a maximum of 80% of the value of the shares, depending on what they are.
Of course, an important caveat here is that margin loans increase risks and in an extreme market sell off can result in your shares being sold unless you supply an increased cash margin.
Reducing CGT Liabilities
Interest costs also apply but as a way of still reducing CGT liabilities by prolonging the period over which sales are made or as a way to meet temporary cash requirements without a sale, these strategies are worth considering and are commonplace in the United States.
Another strategy might be to increase payments out of tax sheltered superannuation to meet any pressing financial needs, leaving the assets outside super untouched and untaxed.
Whatever strategy you arrive at, considering Warren Buffett’s wise words about buying assets for the long term and potentially holding them forever is well worth remembering.
