Tax implications on June distribution.

Sorry if this has been asked before.

Just trying to get clarification on the June distribution.

Although it is classed as a June 'payment', it is actually recieved in July, so do you declare the income in the current financial year or next years?

 

June distribution

Even though the income is not received until approx. 12 July it is assessed as being received in this fiscal years income (ie 30 June 06). It would be nice to defer it though to next years tax, but it's not going to happen

Bob

 

Thanks for that Bob.

 

Hey Bob

I'm just wondering why this is exactly... I thought individuals and most SMEs operated on cash accounting opposed to accrual accounting principles. I would have thought revenues and expenses would be reported against the cash inflows/outflows rather than the recorded revenue/expense.

I've never actually received a June distribution, this is just from what Nigel likes to call 'book learnin'.

-T-

 

June distributions

Alan summed it up here

Unless the Fund wants to start paying tax they have to distribute all their profits at the end of the year and that is at least from trading profits, dividends and interest on cash held.

Bob

 

Yeah that's true, but sadly there's what are called "timing differences" between tax accounting and corporate accounting...so even if you operate on a cash basis, for tax purposes this is a distribution that's made on 30 June despite being actually received later.

Cheers
N.

 

Ok, thanks Nigel.

So would this be different from salary. For example, your group certificate reports what you've been paid to date and if you are paid monthly, it may only count for 11 months and one day. However, in this instance, are you saying that you are being paid the distribution in the current year, it just doesn't happen to become available for 12 days?

So what about if you buy shares on the last day of the year? Since settlement is T+3, do you count them in the current year or the next year if you are accounting on a cash basis? I'm assuming the current year from this discussion. It would be odd claiming the stop loss fee the year before you actually bought the shares.

You learn something new every day

 

Interesting!

My accountant says the financial year in which you receive the payment is the one in which it is effective.

eg. ANZ Bank used to declare a dividend before the end of the financial year but pay it on the 1st of July but it wasn't added to the previous years income.

 

There's a difference between a trust distribution and a dividend. Dividends are declared but not paid until it goes Ex dividend. Remember companies pay tax and can retain profits, paying it out as dividends whenever they want, if at all.

In contrast, the income from a trust has to be distributed in full each financial year or the trustee pays penalty tax at top marginal rate.

Thus for managed funds the distribution is declared and due on 30 June, the admin side just takes some time.

Cheers
N.

 

Thanks for the clarification Nigel.

What's correct with rental property income received by the rental manager during June but not deposited into the owners account until July?

 

I suspect the answer is the same, but Nick will be definitive on that one.

The analysis there would be that your agent has received the payment therefore you've received that income, despite it not actually reaching your account until the next tax year.

BUT Nick's the accountant... Leave it with us and we'll come back 2 you.

Cheers
N.

 

Nigel is correct. My accountant said to include the Navra June distribution in this year's tax (even though it is not paid until July) - reason as explained by other forumites. But, for dividends - to include them when payment is received. So, for ANZ dividend payable on 1st July it is included in next year's tax.

 

My accountant said to include the rent received by the property manager during June as income for that year, and classified it as "cash in transit".

 

Selling Navra this financial year

Scenario - approx values only
Bought 300K Navra wholesales last July.
Units currently worth approx 8K less than purchased.
Will see a distribution this June, say 3% with current volatility - 9K.

It would appear to make more sense to sell the units now - take the capital loss (there are other capital gains).

This would result in, say 17K less income in the current financial year. Tax at whatever rate would be much more costly than repurchasing the units in the next financial year.

Any comments on this logic?

 

Not sure that I'm following here - perhaps you can spell it out more? You're paying interest to earn this income - which you're now willing forgo - so that is straight loss that you can claim against other income, but you miss out on the bonus of Navra income. You're willing to sell for a capital loss to use to balance against other gains and then re-buy after distribution?

The real value of the capital loss is at most $4K (50% of the 8K) - ie, if you didn't claim the loss, that is the most tax you'd pay on it. Let's dismiss the interest costs now, because you've already paid it and are claiming this in either scenario, so now you're only looking at the personal tax on (say) $9K distribution - which again, at most, is around 4.7K (highest tax rate) so you've got $4.3K in your pocket after the distribution.

Based upon the scenarios for this financial year, you might be better to take the distribution. So, 4.3K in your pocket if you keep them, or 4K (at most) if you don't. They could go down more - so whatever they go down to, you get 50% of that (max) benefit. They could go up - meaning the benefit is diluted.

I wouldn't advise you either way - just need to make sure we understand the final cashflow position.

Cheers, Barracuda

 

NIgel is right.

trust distributions should be included in the current year even though the cash may not be received until after 1 July

Interest, dividends, should be included when received.

Rent should be recorded for the period if the agent is holding it on your behalf.
Remember, they have received it "in trust" for you. So it is your money as soon as it hits their bank account.

I find that if a client provides an annual rent statement from an agent then we reconcile back to that amount even though the June rent may not be processed until 1st or 2nd July.

Fun and games huh !

NickM