SMSF Allocated earnings calculation

Hi,

I am struggling with this concept. Is it: Portfolio end of period - (Portfolio begining of period + capital applied to Portfolio during period)? That makes intuitive sense, but then I'm not an accountant.

If a parcel was sold during the period (and the proceeds reinvested), does that have any bearing?

Cheers

You keep track of two prices, the historical cost and the last period market valuation.

Suppose you have investment A, purchase cost $100, market value at end June 2007 of $150.

Sell on Jan 1st 2008 for $180, and purchase investment B with the proceeds, cost $180.

At end June 2008, B is now worth $200.

Unrealised gains this year is $20 (B yr end value - cost) plus realised gains $30 (A sale - previous yr end value).

Note that your CGT for A will be on the proceeds - cost ($180 - $100), not the opening value !!

You don't have to tax effect this if your SMSF is not a reporting entity - but many Accountants try to make things look complicated and justify their fees.

Cheers,

Rob

Hi Rob,

Thanks for the reply. So in your example would you report the "allocated earnings" (a line on our SMSF return) as $50?
If you have the patience, could you please explain "You don't have to tax effect this if your SMSF is not a reporting entity "? I gather you mean that the after-tax Gain on A is less than $30. Perhaps this is why our operating statement & balance sheet don't agree?

Cheers Robert.

Earnings to be allocated to members based on some reasonable basis:

Realised gains this period $30
Unrealised gains this period $20

Tax effect accounting would add a fictitious asset/liability to adjust for future income tax on those unrealised gains - e.g. a future liability for a discount capital gain (1/3) at a tax rate of 15%.

This is required by Accounting Standards, but most SMSF's do not need to meet these standards.

Cheers,

Rob

Hi again Rob,

Thank you for your patience & the wonderful explainations. I note that my intuitive formula gives the same result, with your simple example. What if I add a third transaction? Say fund has income of $50 which is used to purchase investment C on Feb 1 & C had a yr end $20 value.

This gives rise to:
A $30 (realised)
B $20 (unrealised) &
C -$30 (unrealised)
Total $20

Again the same result: 220 - (150 + 50) = 20

This approach avoids going through our portfolio "line by line", assuming it's valid.

Cheers Robert

Being as a SMSF is an investment vehicle, financial reports must value investment holdings at "market-to-market" to be meaningful, according to the ATO.

This actually means that you must go through your portfolio line-by-line to work out unrealised gains/losses and report them separately from realised gains/losses to give a complete picture.

So in your example, you now have:

Realised gains $30
Unrealised losses -$10

**ALLOCATION**

Each type to be allocated on some reasonable basis, which might be different for each type and even each particular investment.

e.g. suppose C was actually an in-specie contribution from a particular member, and all income/gains/losses for investment C are to be allocated to that member.

e.g. suppose investment C is segregated assets generating exempt pension income to be allocated to a particular pension, whilst the other investments are for accumulation accounts.

If you stuff that up by setting off income against gains & losses you could mis-allocate and lose exempt or complying status !!!

Cheers,

Rob