Tax Treatment

[jmsnz]

Hi,

I'm a new user to this software and still finding my way around. I have several questions about treatment of tax on dividends and how I should record this.
1) Standard dividend paid to me
In this case I have been entering two transactions, one for the dividend amount and then a negative 'account fee' for the tax that has been paid on my behalf.

Two problems with this:
a) I have to enter 2 transactiosn for each dividend
b) I can only identify the value of tax by entering a note in the memo field

2) Dividends Reinvested
In this case I am getting the dividend as shares. The only way I have found to enter this is to create 3 transactions:
- One for the cash dividend
- One for the tax deducted
- A transfer in of the number of shares issued.

I have several problems with this:
a) I now have 3 transactions to enter!!!
b) My cash balance is wrong
c) I have no way of dealing with the rounding difference between the number of shares issued and their value. For example:
Dividend $1000
Tax Paid $300
Shares issued 303 @ 2.31 = $699.93

Can you direct me to some examples of the 'best practice' for handling these.

Cheers

John

[Mark]

Hello John,

In general, Fund Manager is all 'pre-tax'. Fund Manager reports your information for tax purposes, like dividends received, capital gains/losses etc, but it does not get into tracking your tax rate, taxes paid, and figuring after tax returns.

Having said that, some people do track taxes taken out, like foreign taxes paid. Is this why you are having taxes withheld? The most common approach to tracking foreign taxes withheld is to treat them as their own distribution type, usually "Other". I would recommend using "Other" instead of "Account Fee". Account Fee transactions adjust your cost basis. So, if you paid an account fee, this fee is distributed among the shares you owned at the time, and added to the cost basis of these shares. Account Fee and Return of Capital distribution types are unique in this manner, in that they adjust your cost basis. All other distribution types do not affect your cost basis. So, in the case of foreign tax withheld, you probably do not want your cost basis adjusted, which is why I'd use "Other" to track these.

To track taxes withheld, just record them as a negative "Other" distribution. So, for your example, if you received $1000 in dividends, but $300 was withheld, record a $1000 dividend, and a -300 Other distribution. Your foreign tax withheld is the full amount of the Other distribution, so you do not have to rely on the memo field. You will have to enter 2 transaction if you want to track both the dividend and foreign tax withheld. In the case of reinvestments, it is still the same. You should not have to record a transfer in, and your cash account should be correct with just the 2 distributions. Record both of them as "reinvested", one for a positive number of shares, and one for a negative number. There will then be no need for a transfer. To deal with any rounding issues, make sure the shares and value are correct in both transactions, and let any rounding differences go into the price field.

Dividend: $1000 = 432.9 @ 2.31
Other: -$300 = -129.9 @ 2.30947

When recording these, enter the value, hit Tab, enter the shares, and hit Tab again. The price will fill in with the rounded amount, and the value/shares will be exactly as you need.

In the reinvestment case, your cash balance should not change if you record both of these as reinvested.

When you track foreign taxes paid as negative "Other" distributions your overall return will show as lower than if you weren't tracking these. You are now taking into account the reduced performance because of these withheld taxes.

[jmsnz]

Mark,

Thanks for the prompt reply.

> Is this why you are having taxes withheld?
I don't want/expect FM to do my tax return but in my example I would need to declare $1,000 of income and tax paid of $300 from which there may or may not be an adjustment depending on my personal tax rate. The $1000 or $700 are not much use on their own.

I had tried the reinvestment method but had trouble getting the right values, but hadn't got my head around the negative shares concept.

Any tips on changing transactions 'in bulk'?

Cheers

John

[Mark]

Hi John,

The best place to edit in bulk is the Data Register. Open it up, and set the Data Type to "Distributions (all)". You'll see all your recorded distribution transactions, so can just select the one you want to modify and then press "Edit...".

[modelerMike]

So , in order to get after-tax real returns one would have to make use of 'other distributions' to reflect taxes on all sales and distributions and then reduce these after tax nominal returns by a cpi index benchmark return. Does this make sense ? Any better alternatve to getting after-tax real returns in FM ? Guidance appreciated.

Regards, Mike

PS I realize this is an estimate of actual taxes paid; maybe it would be better to use the term 'real after-statutory-tax return'

[Mark]

Hi Mike,

Since the earlier posts we've released v10, where there are more distribution types, and you can customize the labels. You might want to create a distribution type called "Taxes Paid" or something like that. Use "Options / Distribution Labels...". To reduce your performance for taxes paid, record a negative distribution into this type that you've specified. Coming up with the amount to use is outside of the scope of Fund Manager, but this is how you would reduce your performance to model taxes paid.