How are DRP units/shares taxed?

Discussion in 'Accounting & Tax' started by chylld, 7th Jul, 2017.

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  1. chylld

    chylld Well-Known Member

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    When units in a managed fund or shares in a company are reinvested through a DRP/similar, how are they taxed?

    The ATO says:
    I expect this means that whether or not distributions/dividends are reinvested, they still count as taxable income. That much seems pretty self-explanatory.

    However what happens on sale of a fund/shares with respect to CGT? Is the distribution/dividend counted as a capital gain on the original investment and taxed again, or are the units/shares acquired via DRP counted as a new investment?
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    there could be multiple cost bases.

    This is why I like to get the dividends paid out and the buy more. It is good for debt recycling too.
     
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  3. chylld

    chylld Well-Known Member

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    Multiple cost bases makes the most logical sense.

    I missed the obvious debt recycling benefit of having divs paid out... glad I switched all my funds off DRP a few months ago :)
     
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  4. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    The dividend is assessable as received and the new shares have a costbase and costdate based on the issue date

    The amount of the dividend is NOT the costbase. You will find most companies carry a minor account for the trivial sums owing as a result. Often a dollar or two or less.

    If you have registry access you can reconstruct your records:
    - Transaction holding history will show dates and qty issued of your entire holding incl DRPs
    - Div history will show assessable amounts and dates of each DRP or cash payt
    - Div History will also show on each notice the costbase for the relevant parcel (issue price per share)

    DRP shares are often issued at market and have no brokerage. The debt recycling issue is so trivial it may pay a postage stamp unless your holding is significant.
    DRP dividends are based on the date of payment NOT the company years ended info shown on dividend notices. Take care

    Trust distributions are NOT based on date actually paid. Many managed trusts pay a final 2017 distribution in July or even August that is still included in the 2017 tax report. The tax report will assist you to prepare a tax return. Many managed funds reinvest accrued income as further units - Generally income is earned at 30 June and then 01 July new units are issued

    Many ETFs are trusts NOT company dividends
     
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  5. chylld

    chylld Well-Known Member

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    Thanks Paul, yep I've been recording all of my dividends and distributions as separate transactions to prevent all acquisitions of a single equity mixing together and creating a tax mess. For some reason my brain didn't make the connection between the multiple cost bases and the separate tax treatment.

    The upside is that my forecast spreadsheet is now no longer unnecessarily pessimistic :)
     
  6. Peter P

    Peter P Well-Known Member

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    I'm not 100% clear on the DRP vs receiving the dividend then buying more (of the same shares). What's the difference? Also, DRP would avoid brokerage costs
     
  7. chylld

    chylld Well-Known Member

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    In addition to avoiding brokerage costs there is sometimes a small discount as DRP acquires units at NAV (net asset value) rather than the Buy price. (often mid-way between Buy and Sell prices)

    edit: the big disadvantage of DRP is that it doesn't allow you to debt recycle as Terry explains below :)
     
    Last edited: 7th Jul, 2017
  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Instead of receiving $78 worth of shares, for example, you could receive $78 and pay your loan down by this amount and reborrow - after paying down say $5000 to $10k in total.

    That way you get few larger chunks rather than multiple smaller chunks
     
  9. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    $78 x 5% pa gives an increased deduction of $3. At avg tax rates that an $1 increased refund.

    upload_2017-7-7_15-16-53.jpeg

    In 20 years time you may have a tax saving sufficient to buy a meal. And a $1560 debt.
     
  10. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Lol !

    it is not the debt recycling aspect that I was focusing on, but just the cumbersome nature of it all.

    Imagine if you had 20 different shares each paying say $200 dividends per 6 months.
     
  11. bumskins

    bumskins Well-Known Member

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  12. Marg4000

    Marg4000 Well-Known Member

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    A simple spreadsheet takes care of it. Less than two minutes to update each shareholding with the number of shares issued and the purchase price of each (info supplied on dividend statement). The spreadsheet takes care of all the calculations and running totals.

    For 20 shares (doesn't make any difference how much the dividend is) I would be looking at around one hour, twice a year, if that.

    Retired now and below tax thresholds but I still do the updates for general interest. CGT not an issue any more for me unless there is a major boom and I sell everything at once!
    Marg
     
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