Managed Funds - EOFY distributions reinvested

Discussion in 'Accounting & Tax' started by thesuperman, 15th Jul, 2015.

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  1. thesuperman

    thesuperman Well-Known Member

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    If you invest in a managed fund & elect for distributions to be reinvested, are those distributions at 30th June taxable every year or only when you sell out of the managed fund many years down the track?

    Eg. you invest $100k on 20th June & 10 days later on the 30th June the Fund makes a $20k distribution that is reinvested, but the value of your units is still valued $100k on the 1st July. I would think that's pretty silly if you are expected to pay tax on the $20k when you haven't made one cent of increased income or capital gain.
     
    thesuperman, 15th Jul, 2015
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  2. Simon Hampel

    Simon Hampel Founder Staff Member

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    Yes, the distribution is taxable in the year in which it is declared - regardless of whether you reinvest it or not.

    Reinvesting distribution is basically the same as receiving the cash (income) and then choosing to buy more units with it (new capital investment).
     
    Simon Hampel, 15th Jul, 2015
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  3. Simon Hampel

    Simon Hampel Founder Staff Member

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    For the reasons you identified - you might not want to invest immediately before a distribution is calculated, but there are also reasons you might choose to do so (converting capital to income or perhaps generating a capital loss if you choose to sell immediately after the distribution is paid).
     
    Simon Hampel, 15th Jul, 2015
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  4. thesuperman

    thesuperman Well-Known Member

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    Wow, seriously the ATO would tax you on $20k when you haven't made any money whatsoever? Your investment might have even gone down in that period & they will still tax you on $20k? That's absolutely crazy imo!
     
    Last edited: 15th Jul, 2015
    thesuperman, 15th Jul, 2015
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  5. Simon Hampel

    Simon Hampel Founder Staff Member

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    That's the way it works.

    Generally you don't invest for a short period of time, so over time it all evens out.

    Like I said - you can also use this quirk to your advantage ... if you know you'll have a capital gain in the following financial year and perhaps you have tax losses this financial year - but you also have some capital available, then you can invest just before a distribution to realise income this financial year and then sell after the unit price has dropped in the following financial year to generate a capital loss which will offset the future capital gain.
     
    Simon Hampel, 15th Jul, 2015
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  6. Terry_w

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

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    The $20k is income = you have made money. income is taxed.
     
    Terry_w, 15th Jul, 2015
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  7. thesuperman

    thesuperman Well-Known Member

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    Also does anyone know if here are any managed funds that don't pay a distribution at EOFY but just have the fund price grow in value or do all of them pay a distribution at 3th June?
     
    thesuperman, 15th Jul, 2015
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  8. Simon Hampel

    Simon Hampel Founder Staff Member

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    Managed Funds typically use Unit Trusts, which are obliged to pay out all net income to unit holders at the end of each financial year.

    However, there are some funds which use things like internal gearing to amplify the gains, and they might use most of their income to service the interest on the loans they hold, so there isn't much income to distribute anyway - but if there was, they would have to distribute it.

    If you want an investment vehicle which doesn't pay out income, then a unit trust (managed fund) is not what you are looking for. Perhaps look at LICs or some other type of structured investment instead?
     
    Simon Hampel, 15th Jul, 2015
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  9. The Falcon

    The Falcon Well-Known Member

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    Ah yes, a major issue with typical managed funds high churn rate (turnover) with no consideration about what this does to the poor unit holder come tax time. Aside from buying big LICs , market cap weighted ETFs or managed funds run by managers who are tax aware (IML comes to mind), or buying direct stocks and limiting turnover I have to other ideas that may have merit ;

    - listed investment companies AFI and WHF operate bonus share schemes whereby additional shares are issued rather than dividends and taxable only at time of disposal

    - some companies do not pay dividends as they are able to redeploy capital internally at a higher rate of return. US listed "compounders" like Berkshire Hathaway or Markel Corporation for example fit the Bill.

    DYOR of course.
     
    The Falcon, 15th Jul, 2015
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  10. thesuperman

    thesuperman Well-Known Member

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    Ok thanks for the suggestions :) Unfortunately Berkshire Hathaway has been an absolute shocker this year & went down. I think they've gone past their use by date these days.
     
    thesuperman, 15th Jul, 2015
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  11. Simon Hampel

    Simon Hampel Founder Staff Member

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    Buying opportunity?
     
    Simon Hampel, 15th Jul, 2015
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  12. The Falcon

    The Falcon Well-Known Member

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    Ha. Ok then.

    Currently around 1.3x BV I'd suggest it's one of the better value stocks in the S&P. If you are looking at something like BRK in a 12 month window you are looking at it all wrong IMHO.
     
    The Falcon, 15th Jul, 2015
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  13. twobobsworth

    twobobsworth Well-Known Member

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    Not to mention much of the distribution is realised capital gains and can only be offset by your capital losses, if you have any.
     
    twobobsworth, 15th Jul, 2015
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  14. Simon Hampel

    Simon Hampel Founder Staff Member

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    That depends on the fund.

    There are some good imputation funds out there which pay out dividends with high franking rates.
     
    Simon Hampel, 16th Jul, 2015
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  15. Paul@PAS

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

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    Managed Fund distributions are also not taxed on a "cash" basis but a present entitlement basis. Basically it means accruals.. Most such funds are actually a trust.

    They are also not taxed on a cash basis and the year end tax report is critical.

    Fortunately most managed funds also track and report on CGT matters such as when you sell down some or all of the units. These calcs can be VERY complex otherwise.
     
    Paul@PAS, 16th Jul, 2015
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  16. Redwing

    Redwing Well-Known Member

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    Are there any like that in OZ though, or you are taxed on 'unrealised gains'?
     
    Redwing, 16th Jul, 2015
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  17. The Falcon

    The Falcon Well-Known Member

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    closest is LICs bonus share plans. I'm not aware of any holding company with diversified assets on the ASX which retains all income for reinvestment and thereby defers tax for holders. Plenty of stocks don't pay divis though ;)
     
    The Falcon, 16th Jul, 2015
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