Ask Colin

How can I manage the order in which I sell parcels of a stock for tax purposes?

The detailed question was:

My investment plan allows me to purchase max share lots of approx $2200-$2500 each and when one of these lots has achieved my profit target, I want to be able to sell the lot that is more than 12 months old in order to also manage the Capital Gain Tax. But when I approached my online broker (Commsec) they said that all shares are "bundled into one holding" so there is no way to Sell particular lots of shares. I noticed on your Portfolio Details PDF you have the "Confirmation Note Number" listed, and so I wondered if you have a way of managing this?

Do all brokerage firms work this way? Is it an ASX procedure, or is there a way of managing this? Also with you recent sell down of Vocus Communications, did you just sell some of your "holding" or the shares from your first purchase?

 

If you are using Commsec (or any other on-line broker), you will have to have a CHESS account with a HIN number that identifies you as an investor. As you buy more parcels of shares in a stock, CHESS adds those shares to your CHESS account. When you get your monthly CHESS statement it will show the transactions and also the total holding in that stock. When you sell some of those shares, that transaction is added to the CHESS statement and the number of shares held is reduced. CHESS does not distinguish between parcels bought and sold in determining the balance. This is because shares in a company are fungible. It is the net result of your purchases and sales that is relevant for recording the volume of that asset that you own at any one time.

 

Likewise, for your broker, shares in a company are fungible and when you want to sell some of your shares, there is no useful reason for the broker to distinguish which purchase they related to. CHESS does not record this and neither does the broker.

 

You question actually relates to a quite different issue – that of taxation. Here, I must warn you that I am not a licensed taxation adviser and have no special knowledge of tax law. What I am about to tell you is what I understand to be the law, but before you act on it, you should do your own research, consult the ATO, who can be very helpful, or maybe seek advice from your tax accountant. I said “maybe”, because I am aware of situations where I believe tax accountants give investor incorrect advice on this issue (and very commonly it seems on tax invoices, but that is a different subject).

 

First, you asked what I do.

 

I record in my spreadsheet all my purchased parcels of a stock separately, as it seems you do from your attachment. The date is very important. I record also the broker confirmation number, because it assists in checking and is also very useful for my tax accountant in finding the documents on the DVD I provide to prepare my tax returns.

 

When I sell part of my holding, e.g. Vocus Communications, I will record for tax that I have sold the oldest parcel(s) first. In the SMSF, capital gain tax is not relevant, but if it was, in another portfolio, that would still make sense in selling any holding that happened to be more than a year old. However, that may not be the best thing in all situations and you will have seen that recently I sold the last-purchased holding in Brierty first, though that was an unusual special case.

 

My understanding of the tax law is that taxpayers can decide to sell parcels they have purchased in any order they like. It is their decision to make as taxpayers and the ATO must accept their decision. There may be some exceptional situations, but they are outside my area of knowledge.

 

So, what CHESS does and your broker does, is to record purchases, sales and the balance of your account. They have no role to play in deciding what parcel is deemed to have been sold for tax purposes. That is your election.

 

Again, a warning: This is my understanding. I believe it is correct, but don’t assume it is necessarily reliable. You need to check this before acting on it. If you ask your tax accountant and he/she agrees with me, I would go with it. Otherwise, I would check with the ATO. I am fairly sure they have a detailed publication on capital gain tax you can request or read online, but otherwise, wait and talk to someone there.

 

I hope this is useful.    

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