Re: Tax Credits

[ Q2 03 - Q4 05 Archive ] [ Current Message Board ] [ Archives ] [ Search ]

In Reply to: Tax Credits posted by Gary Wilson on April 30, 2005 at 22:19:15:

: A fellow Australian asked a question sometime ago about the Australian System of "Franking Credits" or Tax Credits (not withholding tax) that come with some dividends paid in Australia.

: I think part of the issue was how to get the yield to reflect this tax benefit, but at same time be able to reconcile with cash receipt in Cash Account. I think at that time we sorta hit a brick wall. I was not that concerned because I do not use the Cash Account function and even though I have loaded the cash dividend (ie a mix of taxed & non-taxed), ... my philosophy is its better to be approximately correct than precisely wrong, ... so if Fund Manager showed a 2% return on my portfolio I knew whatever the degree of precision ... it wasn't a great year! Nevertheless one should strive for accuracy & also be ultimately be concerned with after tax returns.

: What is obvious, whatever you do ... the dividends should be treated consistently ... ie as gross, subject to tax, ... or net of tax. This is of course contrary to what I have been doing! [I can claim consistency by loading the cash dividend, ... but there is a flaw there I think ;-) ]

: Given how Fund Manager is set up I should have always been loading the "gross dividend" then at least I would be able to accurately compare different investments, ... and also estimate an after tax returm.

: Dealing with these tax credits is messy because in Australia (& New Zealand) each successive dividend from the same entity can have diffrent levels of tax effectiveness. So if Fund Manager were to cater for this so you could identify cash & tax benefit component of return it would have to be dealt with at the transaction level.

: Australia & New Zealand are not the only jurisdictions that have a "Tax Credit" system on dividends.

: Actually it would be nice for Fund Manager to calculate both before & after tax returns, but this requires dealing with issues on income, capital gains & the users own tax status, ... perhaps a little much to ask for?

: Anyway if anyone has a better solution to this & similar issues I would love to hear it!

Hi Gary,

Yes, this can get complicated when you start trying to include taxes paid. As you know, Fund Manager will report your gains/losses for tax purposes, but it doesn't get into any tax calculations. It is probably a matter of personal preference on how to record distributions that offer a tax credit. You could simply record them all as pre-tax values, and compare results this way. This is probably the simplest. It would also be a good idea to separate the franked vs. non-franked distributions, so you can keep records of the two. This is often where people use the "Other" distribution type. If you want to try and include some of the tax benefits of franked distributions into the return calculations you could record another distribution equal to the amount of benefit realized by the franked distribution. That is starting to get rather complicated, but it could be done.

In general, Fund Managers performance figures do not include your tax burden. For example, you may pay a different tax rate on short vs. long term capital gains. None of this is factored into yields.

Thanks,
Mark
--
Mark Beiley
Fund Manager, portfolio management software for Windows 95/98/ME/NT/00/XP/2003

Replies:

• Re: Tax Credits John Mott 02:42:41 05/11/05 (0)