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A newby question re tax on Distributions...

Discussion in 'Accounting, Tax & Legal' started by Starkers, 23rd May, 2007.

  1. Starkers

    Starkers Member

    Joined:
    23rd May, 2007
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    Location:
    Sydney
    Hi,

    Please bear with me if this question comes across a little confusingly...

    I have recently purchased units in a managed fund. The fund will pay a distribution on the 30th June. As I understand it, the value of a unit in the fund will be reduced at that point in time by the value of the distribution. E.g. I purchase at $2 per unit and receive a distribution of 20 cents per unit. Each unit is now worth $1.80 (presumably profits whether they be capital gains, interest or dividends accumulate within the fund during the year, hence increasing the value of each unit until such time as those profits are paid out via a distribution to unit holders - I think!?). So, I have a couple of questions:

    Tax on the distribution: let's say I bought at $2/unit on the 29th June, and received a distribution of 20 cents on the 30th June. Do I declare that distribution as income for tax purposes, even though my net benefit is $0 (i.e. unit is now only worth $1.80)?

    Assuming I do have to declare the distribution, do I have to declare the income components of that distribution separately (i.e. interest, dividends and capital gains all may form part of the distribution), or do I simply declare the distribution as a whole as income?

    If I do have to declare the components separately, then what is my CGT liability? Let's say the fund advises that 10c of that 20c distribution is a capital gain, am I liable for the full 10c as a gain, given that I have only just purchased units in the fund?

    Apologies if the above is confusing - confuses the h*ll out of me : )

    Hoping someone can shed some light or point out any obvious errors in my assumptions above!

    Cheers
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Yes, income is income - you have to declare it and pay tax on it.

    There are separate sections of the tax return for capital gains versus income ... and you also want to check whether there are any franking credits that go along with the income component. You'll get a statement at the end of financial year (if you haven't got it already), which details specifically how much of each you received. Just give this info to your accountant / tax specialist.

    Yup - still liable (assuming you don't have other capital losses to offset it against).

    It's not as bad as it seems - it's just a timing thing. When you first invest in a fund you may get this situation depending on when you made the investment. Annoying in the short term, but it will be trivial over the longer term - so don't sweat it.
     
  3. MattR

    MattR Well-Known Member

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    If its a public fund then you'll need to wait for the annual "Tax Summary", which they generally issue by September. It will breakup the income components on the distribution(s) and will show the discount if any on capital gains income (care must be taken if you invest via your SMSF as the discount usually shown is the 50% not the 33.33% for SMSF's).

    If you have redeemed or sold units in the fund itself then that is a seperate issue and hence the capital gains discount will depend on the lenght of time the units were held by you.
     
  4. Rod_WA

    Rod_WA Well-Known Member

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    Inglewood, WA
    It's also worth understanding:
    1. The various components (dividends, capital gains, etc) of the distribution will need to be declared for tax purposes, even if you opt to re-invest the distribution. That is, the tax man does not care if you didn't see the cheque, you still need to pay the tax.
    2. It doesn't really matter when you buy into a fund, the distribution does not take into account your individual timing, eg the fund might realise a capital gain months before you bought in, but you might end up carrying the tax liability. Over the long term though, these things even themselves out and become irrelevant.
     
  5. Starkers

    Starkers Member

    Joined:
    23rd May, 2007
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    Location:
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    Thank you all for your prompt and detailed responses!

    Guess I was struggling to get my head around the fact that I'd be liable for CGT even though investing towards the end of the financial year, but I understand how this is just a timing issue and that it will all balance out eventually (assuming I hold the funds for a reasonable amount of time - which is my intention).

    Thanks again for your help.