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SMSF Allocated earnings calculation

Discussion in 'Accounting, Tax & Legal' started by RobertHolmes, 10th Nov, 2008.

  1. RobertHolmes

    RobertHolmes Member

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    Hi,

    I am struggling with this concept. Is it: Portfolio end of period - (Portfolio begining of period + capital applied to Portfolio during period)? That makes intuitive sense, but then I'm not an accountant.

    If a parcel was sold during the period (and the proceeds reinvested), does that have any bearing?

    Cheers
     
  2. Rob G.

    Rob G. Well-Known Member

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    You keep track of two prices, the historical cost and the last period market valuation.

    Suppose you have investment A, purchase cost $100, market value at end June 2007 of $150.

    Sell on Jan 1st 2008 for $180, and purchase investment B with the proceeds, cost $180.

    At end June 2008, B is now worth $200.

    Unrealised gains this year is $20 (B yr end value - cost) plus realised gains $30 (A sale - previous yr end value).

    Note that your CGT for A will be on the proceeds - cost ($180 - $100), not the opening value !!

    You don't have to tax effect this if your SMSF is not a reporting entity - but many Accountants try to make things look complicated and justify their fees.

    Cheers,

    Rob
     
    Last edited by a moderator: 10th Nov, 2008
  3. RobertHolmes

    RobertHolmes Member

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    Hi Rob,

    Thanks for the reply. So in your example would you report the "allocated earnings" (a line on our SMSF return) as $50?
    If you have the patience, could you please explain "You don't have to tax effect this if your SMSF is not a reporting entity "? I gather you mean that the after-tax Gain on A is less than $30. Perhaps this is why our operating statement & balance sheet don't agree?

    Cheers Robert.
     
  4. Rob G.

    Rob G. Well-Known Member

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    Earnings to be allocated to members based on some reasonable basis:

    Realised gains this period $30
    Unrealised gains this period $20

    Tax effect accounting would add a fictitious asset/liability to adjust for future income tax on those unrealised gains - e.g. a future liability for a discount capital gain (1/3) at a tax rate of 15%.

    This is required by Accounting Standards, but most SMSF's do not need to meet these standards.

    Cheers,

    Rob
     
  5. RobertHolmes

    RobertHolmes Member

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    Perfect sense

    Hi again Rob,

    Thank you for your patience & the wonderful explainations. I note that my intuitive formula gives the same result, with your simple example. What if I add a third transaction? Say fund has income of $50 which is used to purchase investment C on Feb 1 & C had a yr end $20 value.

    This gives rise to:
    A $30 (realised)
    B $20 (unrealised) &
    C -$30 (unrealised)
    Total $20

    Again the same result: 220 - (150 + 50) = 20

    This approach avoids going through our portfolio "line by line", assuming it's valid.

    Cheers Robert
     
  6. Rob G.

    Rob G. Well-Known Member

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    Being as a SMSF is an investment vehicle, financial reports must value investment holdings at "market-to-market" to be meaningful, according to the ATO.

    This actually means that you must go through your portfolio line-by-line to work out unrealised gains/losses and report them separately from realised gains/losses to give a complete picture.

    So in your example, you now have:

    Realised gains $30
    Unrealised losses -$10

    **ALLOCATION**

    Each type to be allocated on some reasonable basis, which might be different for each type and even each particular investment.

    e.g. suppose C was actually an in-specie contribution from a particular member, and all income/gains/losses for investment C are to be allocated to that member.

    e.g. suppose investment C is segregated assets generating exempt pension income to be allocated to a particular pension, whilst the other investments are for accumulation accounts.

    If you stuff that up by setting off income against gains & losses you could mis-allocate and lose exempt or complying status !!!

    Cheers,

    Rob