Update No. 4 – 24/04/11

Current Period
Apr 01 2011
Current Price
Since inception
EGP Fund No. 1
S&PASX200 (TR)
EGP Fund No. 1 Pty Ltd.  Has opened up a 3.92% lead on the benchmark. We deployed further cash with some success this week and now have 90% in stocks.  We will likely retain the 10% cash for special opportunities (should any arise).
EGP 20.  The EGP20 index has moved by -2.15% since launch.
S&PASX200TR    The benchmark index is up 1.58% since April 1 launch.
I wanted to talk this week about BSP’s (Bonus Share Plans).  I recently stumbled across this articlewhich is pretty good value for those unfamiliar with the concept, but like most mass-finance journalism, aims at a very simple market.
Now a BSP usually runs alongside the Dividend Reinvestment Plan (DRP).  The difference is that a BSP adds to your original cost base whereas the DRP involves receiving the dividends as income in your current tax year and initiating a new cost-base for each example. I will select an example and demonstrate the differences.
Assume on January 2 2003, three people of equal incomes each purchased $10,000.05 in QBE shares – 1227 @ $8.15, the opening price on that day (I selected QBE because they are one of the biggest companies running a BSP).  This being the case, the following spreadsheet will lay out what has happened over the last few years.  The 3 investors each sold their shares on 31 March at the $17.82 opening price (presumably to participate in the launch of EGP Fund No. 1 Pty Ltd).
You can see that Investor 1 utilised the BSP.  They simply bought their 1227 shares, and reinvested their dividends through the BSP each year (they received no Franking Credits).
Investor 2 bought their 1227 shares and signed up for the DRP, taking the Franking Credits (they received FC’s totalling $1,685.92 over the period), but reinvesting the dividends.
Investor 3 simply took the dividends and Franking Credits (they received FC’s totalling $1,392.05 over the period) and retained their original 1227 shares.
The following table sets out what would happen to each investor across various tax rates.  For the sake of simplicity, I have used current tax rates as historic tax rates:
1 Tax Paid
1 Retained
ATR 15.3%
ATR 14.5%
ATR 13.6
2 Tax Paid
2 Retained
ATR 15.2%
ATR 13.5%
ATR 12.2
3 Tax Paid
3 Retained
ATR 9.4%
ATR 7.8%
ATR 6.1
The 15%/30% & 45% columns show the ‘Tax Paid’ (in red) for each investor and the ‘Gain Retained’ (in green) by each investor (this is what was left of the gain after-tax).  In the TTR (True Tax Rate) column, the bold figure is the actual proportion of tax paid based on the decisions used & the tax rates applied.  The ATR (After Tax Return) figure in the same column shows the return each investor at each tax rate received depending on the variables applied.  The rate varies widely from an annualised after tax return of 15.3% to a grim 6.1% return (or between a TTR of 7.5% – 47.3%), all dependant on the tax rate and the investor choices, it pays to make careful and informed decisions around your taxation obligations.  Investor 1 would in-fact be marginally better off in each case in the example, because the last 140 shares had not passed the 12-month rule (and are therefore not subject to the 50% CGT discount for Investor 2) – I did not account for this.

My caveat this week is of-course this (the outcomes) could be very different had QBE suffered a steadily declining share-price over the period measured.  But then if you’re buying a share with the expectation of falling prices, you have probably made your first mistake – Talk next week – Tony Hansen 24/04/2011