After 35 years of stockbroking for some of the biggest houses and investors in Australia and the UK, the Secret Broker is regaling Stockhead readers with his colourful war stories — from the trading floor to the dealer’s desk.

Well, we are coming to the time of year, where you can start to look at shuffling and adjusting things portfolio wise, ahead of the June 30 tax year end cut off.

There are a few options open to you and the Capital Gains Tax (CGT) rules are quite simple to follow, unlike some of the other tax rules and regulations.

Any losses that you may crystallise, can be carried forward and set against any capital gains that you may have created in this tax year or in future years.

This is why I prefer the stockmarket to the horse track, as at least when you have a share punt that goes against you, you can still gain it back in the future.

Betting on the horses may result in tax-free gains but the only real winners are the bookmakers. As they say, the people who drive the nicest cars home after a race are not the owners, punters or trainers but the bookmakers.

As with any well balanced portfolio, you will be heading towards this time with a mixture of winners and losers, and some of the losers may be from bad timing market wise rather than becoming just a dud punt.

If you have a holding which has done particularly well and increased by a larger proportion than your other holdings, you can always trim it back a bit and crystallise a profit.

This is known as ‘taking the top off’ and is used when pruning a larger holding back down to your normal investment size. Then you can sell something else at a loss and offset the loss against your gain.

There are two ways of doing this. You can either just sell a losing share outright and take the cash or you can sell the losing position and then if you keep it on your watch list and like it again buy it back at a later date. If may have even fallen further. Boom! This will crystallise your loss and give you a new lower cost base.


laterKeeping it above board

In old broking days selling a holding and then buying it back was known as ‘bed and breakfast’. This term came about because if you sell one day and buy it back at a later date, you have created two contract notes with two different dates, so technically they are at arm’s length.

I worked with a tight-arsed Scottish guy who would save on the commission and transfer his losses to his wife or mother-in-law (depending on who was moaning at him the most at the time) and then spend months having to prove to the taxman that it was all above board.

Two contracts with two different dates is all that he needed to produce my ‘bed and breakfast’ CGT trades.

The ATO is  hot on it these days and may consider it a “wash sale” so make sure you get the right advice.

So, if you have a portfolio holding size of say $50,000 for each share and one has risen to $90,000 and another has fallen to $30,000 (and you like the company but you just got your timing wrong) you can sell the losing one and then potentially buy it back at a later date, creating a $20,000 capital loss.

This will then allow you to trim the $90,000 holding back by selling enough shares to create a $20,000 gain and bring that holding back towards being nearer into line with your other holdings.

You could even buy another $20,000 worth of the losing position to bring it back up to the $50,000 holding again, if you so wish.

Another option to the above, is to create that ‘bed and breakfast’ loss and ‘then take the top off’ the winning position on July 1. This will give you a whole year to worry about the gain created and how to offset it before June 30, 2021.

I have talked about this Australian tax time date before because it does not apply to other countries’ tax rules (UK tax year ends April 5) and can create oversold positions in some stocks ahead of June 30.

We always had orders from UK clients to buy any of these stocks, as they tended to recover by about mid-July.

Of course one needs to take advice from a tax professional about ones own tax position before making any decisions to rebalance your portfolio.

‘Cutting the flowers, watering the weeds’

Peter Lynch, who is considered one of the Godfathers of modern stockmarket investing, has a quote: “Selling your winners and holding your losers is like cutting the flowers and watering the weeds”.

While this is sage advice for the long term, it doesn’t necessarily apply when tax time arrives. So don’t be afraid of bringing out the shears, even if it means not waiting for the 12-month 50 per cent CGT bonus to come into play.

My only other observations that come about at this time of year are as I said before, take advice from a tax adviser first and if you have had a good year trading away and created yourself a healthy amount of tax to pay, always have it in cash, ready to go.

I have seen and experienced myself the unnecessary stress you can create for yourself by not bothering to plan properly and relying on selling some shares to pay for it, only to see them get suspended by the ASX or collapse in price.

This year, June 30 falls on a Tuesday, which gives you plenty of time to spend the weekend before in the garden, working out which bits need trimming, which bits need watering and which bits have somehow turned into a steaming pile of manure.

Or you could always just phone this guy!

The Secret Broker can be found on Twitter here @SecretBrokerAU or on email at [email protected].

Feel free to contact him with your best stock tips and ideas.

This article does not constitute financial product or tax advice. You should consider obtaining independent advice before making any financial or tax decisions.