Shares and taxes: Investors sit tight

The market data isn’t showing there’s a selling spree going on.

Summary: Crystallising losses to offset capital gains is a well-worn pre-June 30 tax route. But even though the market has done little to deliver stunning returns for many so far this year, trading volumes aren’t indicating investors are selling off in droves.

Key take-out: Those considering selling off before June 30 to offset capital gains should familiarise themselves with the Tax Office’s wash rules. The ATO actively monitors such transactions.

In the lead-up to June 30, one might expect share market trading volumes to pick up as investors adjust their portfolios and also crystallise losses to offset their capital gains tax liabilities.

Yet, in the period generally known for tax-selling, it seems many retail investors are sitting tight.

Paul Rayson, executive general manager of Australia’s biggest broking firm CommSec, says that rather than rising at the moment, his firm’s retail trading volumes are down about 15 per cent since the middle of May. And that’s reflective of the whole market, because CommSec has just under a 45 per cent market share of Australia’s online trading sector.

Rayson said the local market “feels directionless” – and we shouldn’t expect tax-selling to kick it.

“The adage is that investors sell in May and June, and you do always have individual investors making their own decisions about their portfolio, any unrealised losses they are sitting on and their overall tax position,” said Rayson.

“But if you look at the data broadly and drill down into small cap stocks – where you have greater price volatility and lower liquidity – there’s actually no increase in trading activity in June, in any of the years. I thought you might see a bit of a pickup, but there’s actually none. The data just doesn’t support June selling.”

Global markets have been copping labels like “toppy” and “expensive”, with the Australian market no exception, even as it trended down in May. The All Ordinaries started May at 5976 points and is now at around 5700 points.

Investors are voicing their struggles to find value, and then there’s geopolitical concerns, which is translating into what Rayson describes as “subdued trading”.

Although it’s hard to say why the ASX is behaving the way it is, compared to its higher performing peers, Rayson believes “investors are looking for a signal, one way or another”.

“I think it comes down to a raft of negative news, particularly in the local market,” said Rayson.

“There’s concern about an economic slowdown, as well as uncertainty about the effectiveness of the Trump agenda. Locally, bank stocks are down between 10 and 15 per cent, again due to a low credit growth environment, housing concerns, and partially, the bank levy.”

Rayson said some years the market will dip in June to rise in July, but other years it won’t. Drawing on 10-year data, he said the moves appear to be pretty random, and there isn’t a discernible trend.

Tax comes second

Tax-selling doesn’t seem to be a driver, which is a practice said to occur ahead of June 30 when retail investors sell out of losing positions to offset capital gains realised in other equities.

The goal of tax-selling is reducing the amount owed to the ATO.

Nabtrade’s head of SMSF and investor behaviour, Gemma Dale, said her trading volume data reflected Rayson’s.

There appears to be a lack of motivation in the market, according to Dale, but she still cautioned against using tax as a primary motivation.

“Tax should always be a secondary consideration to investment,” said Dale.

“Having no confidence at all in a stock presents a clear opportunity to sell, and similarly, if there is an opportunity to take a profit, but maybe you still like the stock, you could hope there is a dip and buy back again.”

Don’t get caught in the wash

As always though, investors should be wary of getting caught in the Australian Tax Office (ATO) wash-up through a “wash sale”.

Selling out of a losing position in the lead-up to June 30, only to buy back in a short time later, could be frowned upon – even if this wasn’t for tax purposes.

The ATO released its wash sale ruling in early 2008. Repurchasing a previously sold asset at “substantially the same” price could get investors on the wrong side of anti-avoidance law. There’s about 10 more related arrangements that could also cause similar problems with the ATO.

Mark Chapman, director of tax communications at H&R Block, said it’s still quite common for clients to propose wash sales.

What he sees less of, which he wishes he saw more of, were clients consulting their financial advisers and planners before trading equities.

“By and large, we hear of transactions for the first time when the client comes in for their tax return, but advice should often precede that. More investors should talk to their advisers before they are just left dealing with the tax consequences afterwards.”

Advice to sell-outs

For those fortunate enough to be sitting on unrealised capital gains, Chapman’s advice is to get comfortable, so to speak.

“It’s obviously quite common to sell loss-making shares to offset against capital gains made in the year – but equally, if you are planning to sell shares you’ve made a capital gain on right now, it actually makes sense to defer that until July 1,” he said.

“You buy yourself another year in terms of paying the tax just by moving the sale four weeks forward.”

Andrew Buchan, a partner in wealth management and superannuation at HLB Mann Judd, thinks about selling out in a different way.

“My personal rule of thumb is, if the stock doubles in 12 months, I want to sell half of it because there’s the money back and everything else is just cream on the table,” said Buchan.

“You haven’t lost anything, even if it crashes and burns, and all you have is profit going forward. Of course, you must remember that capital gains is discounted after 365 days, so try and hold out for the year to get the discount.”