There was a time when you could almost ignore taxation when investing in equities. I think understanding the entity you hold your investments in and testing future tax scenarios for different types of stock is now more important than ever. Under labours new proposals taxation has become quite complex and not something that can be easily worked out on the back of an envelope. I suspect investing the wrong types of stocks in the wrong entity will make a significant difference to your terminal sale value after taxes.
I’m probably a bit old tech here, but I’ve been working on an excel spreadsheet (call me a dinosaur) that calculates terminal sale values for a business based on earnings growth, ROE, payout ratio, dividends, percentage franking credits, marginal tax rates, and CGT held through different entities.
I’m still checking the formula for errors and tweaking the spreadsheet. To date I’ve been testing it with Smart Group (SIQ) and comparing terminal sale values at holding periods from 1 to 10 years under 0% tax (eg SMSF in pension phase), 15% (eg SMSF before pension phase) 30% marginal rate and a 48% marginal tax rate for high income earners outside of super.
The 10 year terminal sale values are: 0% tax ($43.42), 15% tax ($39.93), 30% tax ($36.43), and 48% tax ($32.24).
Assumptions
- Dividends (after tax) are reinvested each year at forecast market price
- SIQ is currently fairly valued (McNiven’s, requiring 11% return)
- ROE 32.4%
- Payout ratio 70%
- Fully franked
- CPI 3%
- CGT above 3% taxed at marginal tax rate
- Terminal Sale value is after income tax and CGT
Someone with more skills using AI might find a smarter, sleeker way of testing these scenarios. Looking at the initial results from my prototype, it is possible to increase your terminal sale value by 20% by investing through a SMSF in pension phase over a 30% marginal tax rate.
Next Im interested in comparing growth companies with quality companies that pay fully franked dividends and have moderate growth in different scenarios.
Who said investing was easy? ;D
Example: SIQ terminal sale value at years 1to 10 under a a 30% marginal tax rate