Questions of the Week – Capital Gains Tax and Medibank

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Question: Under the new super changes, will CGT be payable when a fund is in retirement phase, as opposed to accumulation phase?

Answer (by Paul Rickard): Under the proposed super changes, there won’t be any changes per se to CGT.

If a fund is in pension phase and paying tax at 0%, there is no CGT.

If a fund is in accumulation phase and paying tax at 15%, then CGT is payable (potentially only at 10% due to the one third discount)

With the change that relates to the $1.6 million transfer balance cap, the investment earnings on amounts already in excess of this that are then transferred back to accumulation will become taxable – so potentially, CGT will be payable. Same for transition-to-retirement pensions – where earnings will be taxed at 15% from 1/7/17. Gains on assets supporting a TTR will become liable for CGT.

Question: As a holder of Medibank Private and it recently trading in the $3.20 range I am wondering against some of the headwinds that private health insurers face whether it is time to take some profits as I can’t see that there is too much upside left in the stock in the short term. Just wondering what your thoughts are.

Answer (by Paul Rickard): I am struggling to understand why Medibank (MPL) is trading around $3.20, when the consensus broker target price is $2.70 and no major broker has a valuation over $3.00.

It is currently trading on a multiple of 22.2 times FY16 earnings, and 21.8 times FY 17 earnings. The yield is a pretty unimpressive 3.4%.

Obviously, some of the Fund Managers think that there is still a huge “cost-out” opportunity for MPL.

I, like you, am worried about the headwind of falling membership as health insurance becomes so expensive.

For me, Medibank is a sell around $3.20 – can’t see the upside potential.

You can read my detailed analysis here.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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