Nick Bruining Q+A: How you’ll calculate CGT on shares, and why dividend re-investment plans are a bad idea

Question

I currently take advantage of dividend re-investment plans, or DRP, within my personal share portfolio whenever they are offered by the company concerned.

Will the new capital gains tax rules to take effect next year, make the eventual sale of these shares so complicated that it’s not worth the aggravation?

Should I just take all future dividends as cash payments?

Answer

While the new CGT rules are made complicated by having to quarantine the effective gains under the current system, the impact is not that great.

Under the post-July 2027 system, you will still need to record the date and price individual shares were acquired, as you do now.

When they are sold, instead of dividing the gross profit by two to derive the taxable income — as you do under the current system — you will have to increase the acquisition price or cost base to determine the “inflated” cost base. That will be based on quarterly consumer price index values, published by the Australian Bureau of Statistics.

Let’s say, for example, you received $1000 worth of DRP shares on July 1. For that quarter, the CPI index number is, hypothetically, 1094. Five years later, you sell those shares for $2000 when the index number is 1232.

The growth of the index number represents inflation over that period and, in this case, 1232 divided by 1094 equals 1.126. That means that, through inflation, the inflated value of the shares is now $1126 so your taxable profit will $2000 minus $1126, which equals $874.

This amount is added to the “frozen” gains calculated from the original cost price to the value on June 30, 2027, divided by two.

This too will require individual calculations for each DRP distribution to determine the taxable amount.

While DRP is an effective way to add to your portfolio, I am wary of the practice. You are essentially buying shares “blindly”, having no specific regard to the state of the company or its future prospects.

Most people wouldn’t buy a new share holding that way, so why should it apply to DRP arrangements?

It’s essentially ignoring a tried and tested warning: “Past performance is no guarantee of future performance.”

Question

My wife, who is 72, has an accumulation account of $440,000. I am 77, with a $340,000 account-based pension with the same company.

In the event I die first, would it be better for me to complete a binding nomination to my wife, or my legal personal representative?

Or, should I nominate my wife as a reversionary beneficiary?

Does a reversionary beneficiary result in her being able to retain her accumulation account?

Answer

An individual can have as many accumulation accounts and pension accounts as they like because, once in the superannuation “system”, they are entirely interchangeable.

The only restriction is a transfer balance cap which limits the amount you can have in tax-free ABPs. Currently, the TBC sits at $2.1 million.

A reversionary beneficiary is established at the time the ABP is established. The reversionary beneficiary is similar in concept to a joint ownership. On your passing, she automatically assumes “ownership” of your ABP and can deal with it as required.

For her to become a reversionary beneficiary, your existing ABP is converted back to accumulation and then commence a new ABP with her nominated as the reversionary beneficiary. The advantage of this approach is that on your passing, the payments simply continue.

If, however, you nominate her as a beneficiary using a non-lapsing binding death benefit nomination, she can choose to continue receiving payments and, again, make withdrawals as required.

But this approach introduces a delay between your death and when the fund is transferred.

In all cases, nominating your estate sees the money exiting the superannuation system. She would have to satisfy super contribution rules at that time in order to put the money “back in”.

I would think that this is the least attractive strategy, but entirely appropriate when she is the only one remaining.

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association