An AAG client had been offered free shares from her employer, which is listed on the Australian Stock Exchange, as a part of her performance bonus. The client acquired these shares through her Employer’s Share Scheme (ESS) and she came to us seeking some guidance on what to do with these shares. She was on a high marginal tax rate and had home loan debt, as well as having already reached the $25k per annum Contribution Cap to her superannuation. Her aim was to pay down the balance of her home loan, but if she could, still keep control of the shares.
AAG in Action
After the meeting with the client we asked that she send through any information she may have in regards to these shares, so we could analyse any potential capital gains (or losses). There are special tax rules relating to ESS, as the tax treatment is different if a taxpayer sells their shares within the first 30 days of being given the shares.
We worked through the information to determine a plan for the client, which involved a review of the current shares that had just been granted and could be sold, as well as the shares that she had held for a longer period of time.
Our specialised knowledge in this area means we know exactly what we are looking for and, as we are often the tax agents for the client too, most of the time we are able to consult with the share registries on their behalf.
The client also owned an investment rental property which has gone up in value since it was first purchased and they have their own Self Managed Superannuation Fund (“SMSF”). Under some of the rules of SMSFs, shares that are listed on a stock exchange (not just Australian but around the globe) are able to be purchased from a member however, care must be taken as not all investments can be purchased by the SMSF.
We reviewed the client’s position for:
- The tax implications of the shares, including capital gains tax and the shares being owned by her husband. This involved reviewing the portfolio and calculating the potential capital gains and losses on each of the shares that the client had received over the past 8 years.
- Superannuation and the investment of available funds. The client stipulated that she and her husband wanted to continue to hold the shares, as they believed in the longer term future of the company that she works for.
- The financial and tax implications of paying down the home loan (that is paying down non-tax deductible debt).
Once we had analysed the cost position of her shares, we went to the client with our recommendations which were to:
- Transfer some of the shares to her husband, who was on a lower marginal tax rate. This locked in a capital loss which she could use to offset against future capital gains, which we can carry forward indefinitely. The current value of the investment rental property will provide the opportunity to use the capital losses when the property is eventually sold.
- As her husband was on lower marginal tax rate, it means any dividends are taxed in a lower position, and any potential capital gain in the future would be taxed at a lot lower rate than if it was in her name.
- Transfer some of the stock to their existing SMSF.
- This locked in a further capital loss and, as the SMSF is only taxed at 15% on any income earned, any dividends or any potential capital gains will be taxed at a lower rate than if they were in our client’s name; and
- As the stock was transferred via an off market transfer, the SMSF had to pay her the market rate for this stock. She used these funds to pay down their home loan, decreasing the non-tax deductible debt.
Our client’s objectives were fulfilled. In the process, we were able to:
- Pay $100,000 off the home loan, reducing the non-tax deductible debt, and saving more funds per year to be able to utilised elsewhere.
- We locked in over $100,000 worth of capital losses between the sale of the shares to the SMSF, and the sale of shares to her husband.
- The client retained ownership over the shares within the family (as they are now in the name of her husband and the SMSF).
If you hold shares through an ESS or are just interested in discussing any of the above issues, please contact the AAG team today on (08) 9227 6300 or email firstname.lastname@example.org.
Important information and disclaimer
This publication has been prepared by AustAsia Group including Accounting Services Pty Ltd (Registered Tax Agent No 7587 3005), AustAsia Financial Planning Pty Ltd (AFSL 229454) and AustAsia Finance Brokers Pty Ltd (Australian Credit Licence No 385068).
AustAsia Accounting Services Pty Ltd – Liability limited by a scheme approved under Professional Standards Legislation.
Any advice in this publication is general only and has not been tailored to your circumstances. Accordingly, reliance should not be placed on the information contained in this document as the basis for making any financial investment, insurance, or other decision. Please seek personal advice before acting on this information.
Information in this publication is accurate as at the date of writing, 3 December 2019. Some of the information may have been provided to us by third parties. While it is believed the information is accurate and reliable, the accuracy of that information is not guaranteed in any way.
Opinions constitute our judgement at the time of issue and are subject to change. Neither the Licensee nor any member of AustAsia Group, nor their employees or directors give any warranty of accuracy, nor accept any responsibility, for any errors or omissions in this document.
Any general tax information provided in this publication is intended as a guide only and is based on our general understanding of taxation laws. It is not intended to be a substitute for specialised taxation advice or an assessment of your liabilities, obligations or claim entitlements that arise, or could arise, under taxation law, and we recommend you consult with a registered tax agent.