Selling reinvestments ETF after 1 year of holding?

Question

I read that “If you've owned an ETF for 12 months, the law allows the taxable capital gain to be reduced by 50% for individuals” but does the 12 month period get reset if you automatically reinvest the ETF? I might sell in 1 or 2 years but wasn’t sure if it is worth full participation in the meanwhile.

Answer

Hi Stylish :)

Each DRP is treated as a new purchase for tax purposes.  So you will receive the 12 month discount for each part of the holding that has been held for 12 months or more.

So if your first purchase was in January, and you reinvested dividends in March/June/etc  Then by next February, the first purchase would quality for the CGT discount, but the DRP from March onward would not.

Hope that makes sense.
Dave

Answer

When you invest in an ETF (Exchange Traded Fund) and decide to automatically reinvest the dividends through a Dividend Reinvestment Plan (DRP), the 12-month period for the capital gains tax (CGT) discount does not reset for the original shares you purchased. However, for any new shares acquired through reinvestment, each batch of shares will have its own 12-month period to qualify for the CGT discount.

For example, if you buy shares of an ETF in January 2023 and enroll in a DRP, and dividends are reinvested in July 2023, the original shares from January will be eligible for the CGT discount if held until January 2024. The shares purchased in July 2023 will need to be held until July 2024 to qualify for the same discount.

The CGT discount is significant because it reduces the taxable capital gain by 50% for individuals who have held the asset for more than 12 months. This means if you sell your ETF shares after holding them for over a year, only half of the capital gain is subject to tax, potentially saving you a considerable amount in taxes, especially if you are in a higher tax bracket.

Deciding whether to fully participate in reinvesting dividends through a DRP depends on your investment goals and financial situation. If you plan to sell your shares in 1 or 2 years, you might still benefit from the DRP as each reinvestment is treated independently for tax purposes. This strategy can help in compounding your investment returns, although each reinvestment will need to be held for at least 12 months to benefit from the CGT discount.

As a Pearler customer, you can easily manage your investments and reinvestment preferences directly through the platform. Pearler offers tools that can help you track the holding period of each investment, making it easier to plan for potential tax implications when you decide to sell your shares.

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DIVIDENDS AND TAX

stylish.mannequin

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Dave Gow - Strong Money Australia

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