Question 1: Share registry and super fund administrator Link (LNK) has taken a caning. Following an earnings downgrade, it dropped by more than a quarter. Is it a buy yet?
Answer: I’ve been a huge fan of Link and like many others, were caught totally unaware by the earnings downgrade. It seems like the old story of an Australian company buying a business in the UK. A massive SELL signal, because I struggle to think of a single Aussie company that has made its UK acquisition work. They blamed Brexit – and for sure, this is part of it – but it also looks like they may have caught a falling knife.
It wasn’t a huge earnings downgrade, but when you have marketed the business as being based on “recurring revenue” and extolled your acquisition skills and then disappoint, the market can be pretty harsh. History is also against Link in that the first earnings downgrade is rarely the last.
This all said, the brokers see some value, with a target price of $7.18, some 28.7% higher than the last price of $5.58. There are 6 buys, 1 neutral and 1 sell recommendation. A cautious buy – I don’t think the market will re-rate quickly, so you will need to be patient. (Also see Tony Featherstone’s article today that goes into detail about beaten up stocks like Link)
Question 2: I’m thinking of diversifying into some direct shares in the US. However, I’m unclear on how the tax works in the US, and my online research has come up empty. I understand the Australia side of it (ATO website, thank you very much). But what about the US side? If I get dividends or make a capital gain, do I have to pay tax in the US? Is this done automatically? Are there forms I need to fill in? Do I have to lodge a US tax return?
Answer: Australia has a double taxation agreement with the USA. Provided a valid W-8BEN form has been lodged with the US Department of Inland Revenue, then a 15% withholding tax will be applied to any dividend payment and there will be no deduction to any sale proceeds. If the W-8BEN has not been provided or is not valid, then a withholding tax of 30% will be applied to both dividends and sale proceeds. The latter is effectively a capital gains tax.
If you are resident for Australian taxation purposes, the Australian Taxation Office considers all income (whether derived in Australia or a foreign country) as assessable for income tax. You will receive a credit for any foreign tax (i.e. withholding tax) paid.
Your custodian/broker/share registry will contact you are about lodging the W-8BEN form. It is one of the most incomprehensible/poorly designed forms you will ever experience – but it must be 100% accurate – and I strongly advise you to complete it. You won’t be required to lodge a US tax return.
Question 3: I have held Wesfarmers (WES) shares for many years and I recently received shares in Coles (COL). Early in the new FY I plan to sell the shares in Coles. Can you advise how I calculate the capital gains/loss when I receive the proceeds for this COL sale ? I am unsure what cost base I apply to COL, and I assume I deduct this same cost base from the value of WES ?
Answer: Assuming your Wesfarmers shares were acquired after the start date for capital gains tax (20/9/1985), then you apportion the cost base of these shares as follows: 28.91% to the new Coles share, 71.09% to the Wesfarmers shares. For example, supposed you acquired your Wesfarmers shares at $40. Post the demerger, the cost base for your Coles shares would be $11.564 and your Wesfarmers shares would become $28.436.
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