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Master Member
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There seems to be a problem with the way MySF is calculating the deferred tax liability.
Running MySF 7.0.1, I recently did the year end rollover for the 2007-2008 year.
Looking at the balance sheet, I see the increase in market value for shares is $43,654.81 - this agrees with my calculations as the difference between the total current market value for the shares and the total cost base of the shares.
However, the tax deferred liability is shown as only $2,697.05.
I understand that the tax deferred liability looks at the shares parcel by parcel to check eligibility for CGT discount. In my case the share parcels showing losses of $(219,950.34) is considerably greater than the non-discountable gains of $88,697.98 so after applying the losses to these and then to the discountable gains of $174,907.17 I arrive at a net capital gain of $43,654.81 (which agrees with the increase in market value) which is all discountable.
If I then apply the 1/3 discount, I get a future taxable capital gain of $29,103.21 - tax at 15% on this is $4,365.48.
There are no carried forward capital losses to offset against the future capital gain or carried forward tax losses to offset against income - so why is the tax deferred liability shown as only $2,697.05?
The liability of only $2,697.05 would equate to a taxable profit/gain of $17,980.33 and, even assuming maximum 1/3 discount (which should apply), this would only cover capital gains of $26,970.50 - a difference of some $16,684.31.
If I check account , I can only see one general journal entry with the comment:
Year End Rollover: Record tax deferred liability on change in market value of assets
The transaction is just credit 2140 $2,697.05 and debit the members 3455 accounts for their proportions of this.
Could you please check/explain what is happening here as, to me, this figure is obviously incorrect.
Regards
Neil H.
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MySF Administrator
Group: Administrators
Last Login: 4/11/2010 3:24:01 PM
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Hi,
Unfortunately there are several ways to calculate tax deferred liability and there are also several ways to treat the resulting figure.
The basic way that tax deferred liability is calculated in manual systems or in simple spreadsheets is to say that the amount is 10% of the increase in value (that is the 1/3 discounted amount of the usual 15% tax) is the provision for tax. This is not accurate because it assumes that all asset have been owned for at least 1 year at the time of the calculation which may or may not be true.
The way that MySF Manager calculates the amount is to cycle through each asset and determine the increase or decrease and calculate the tax on each item accordingly. This leads to much more accurate results.
The exact details, itemising each line of gain or loss and the corresponding provision for tax, are shown on the 'Details of deferred liability calculation' tab.
If you do not agree with the itemised calculation then you can change the amounts by clicking on the 'Change tax deferred liability' amounts link just above the lines showing the transaction on the 'Transactions' tab.
Regards,
MySF
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Master Member
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Last Login: 2 days ago @ 9:53:37 PM
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The basic way that tax deferred liability is calculated in manual systems or in simple spreadsheets is to say that the amount is 10% of the increase in value (that is the 1/3 discounted amount of the usual 15% tax) is the provision for tax. This is not accurate because it assumes that all asset have been owned for at least 1 year at the time of the calculation which may or may not be true.
The way that MySF Manager calculates the amount is to cycle through each asset and determine the increase or decrease and calculate the tax on each item accordingly. This leads to much more accurate results.
Yes, I appreciate all that. My spreadsheet also takes all that into account. That is not the problem here though - we are not talking about the accuracy of applying the discount - we are outside that envelope:
• If ALL capital gains were discountable the CGT liability would be 10% of the increase in value.
• If No capital gains were discountable the CGT liability would be 15% of the increase in value.
• MySF has calculated the CGT liability to be approx 6.2% of the increase in value.
The exact details, itemising each line of gain or loss and the corresponding provision for tax, are shown on theThe exact details, itemising each line of gain or loss and the corresponding provision for tax, are shown on the 'Details of deferred liability calculation' tab.
OK, I'm obviously missing this - if I find it I can perhaps see where the problem is coming from. Where is the 'Details of deferred liability calculation' tab. I've looked through the various menu items and reports options but I can't seem to find it.
If you do not agree with the itemised calculation then you can change the amounts by clicking on the 'Change tax deferred liability' amounts link just above the lines showing the transaction on the 'Transactions' tab.
I can't see this anywhere either - but presumably once I find the 'Details of deferred liability calculation' tab then this will be close by 
Regards
Neil H.
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MySF Administrator
Group: Administrators
Last Login: 4/11/2010 3:24:01 PM
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Hi,
The calculation takes place during the year end process and the transaction is displayed on the screen titled 'Year End Process - Unrealised Capital Gains'. The 'Change deferred liability amount' link is blue and is located just above the transaction showing the amounts that will be posted. The 'Details of deferred liability calculation' tab is on this screen also.
Please let us know if you find that the 'Details..' list contains unexpected results.
Regards,
MySF
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Master Member
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Last Login: 2 days ago @ 9:53:37 PM
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So, if I understand you, I have to reverse the year end rollover and then re-do it to be able to see this screen?
Neil H.
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MySF Administrator
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Yes, if you have closed off the year using the year end rollover wizard then you would need to reverse the year end using Housekeeping > Reverse Year End Rollover. After completing the reversal run the year end again and you should be able to see the calculation details.
Regards,
MySF
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Master Member
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Hi,
OK, it has taken some time but I have reversed the rollover and gone through the process again - this time I examined the details of each share parcel and now it is clear how the error arises - it is basically in the method MySF uses when it calculates the liability.
While you say:
Unfortunately there are several ways to calculate tax deferred liability and there are also several ways to treat the resulting figure.
I would contend that there is really only one correct way to calculate the CGT liability - that is to calculate the actual CGT that would be payable if all assets were sold on 30 June at the market valuation. Unfortunately, the MySF method does not do this.
You say:
The way that MySF Manager calculates the amount is to cycle through each asset and determine the increase or decrease and calculate the tax on each item accordingly. This leads to much more accurate results.
However, I found that MySF starts by looking at the period that the share has been held to see if it qualifies for CGT discount - which is fine. Then it sets the tax rate to 10% or 15% accordingly and calculates the liability for each parcel (regardless of whether it is a profit or loss) and sums the results to give a total liability.
The problem is this is not how the ATO tells you to actually calculate the CGT payable. Capital losses are not discounted, they are applied in full against the full capital gains. The discount is then applied, as appropriate, to any remaining capital gains.
The error can be easily demonstrated with a couple of very simple examples:
Example 1:
Asset A: showing a loss of $100k and held for over 1 year
Asset B: showing a gain of $100k and held for less than 1 year
In this case, the actual net capital gain is $0 and there is no liability.
MySF, however, will apply 10% tax to parcel A for a liability of -$10k and 15% tax to parcel B for a liability of $15k and report a total liability of $5k (actual liability is $0)
Example 2:
Asset A: showing a loss of $100k and held for less than 1 year
Asset B: showing a gain of $150k and held for over 1 year
In this case the net capital gain is $50k and is discountable (10% tax) so the actual liability is $5k.
MySF, however, will apply 15% tax to parcel A for a liability of -$15k and 10% tax to parcel B for a liability of $15k and report a total liability of $0 (actual liability is $5k)
In a raging bull market, where nearly all assets are showing profits, your method may have given reasonably accurate results - however given the recent market turmoil where (unless held for several years) a very large proportion of assets may be showing losses, your method can give very misleading results.
In my case, the actual CGT liability was $4365 whereas MySF calculated the liability as $2697.
I appreciate that, as you point out:
If you do not agree with the itemised calculation then you can change the amounts by clicking on the 'Change tax deferred liability' amounts link just above the lines showing the transaction on the 'Transactions' tab.
and, in my case, I am proficient enough in Excel to quickly knock up a spreadsheet to do just that - however many people would be using MySF to avoid having to rely on spreadsheets (I know that was my initial thought) and so will just rely on the calculation to be correct.
I don't know how closely most auditors would look at the provisions for deferred tax liability when considering how profits had been allocated - but a quick check could soon show up a problem.
Given the general level of sophistication of MySF wouldn't have though it was that hard to come up with a method that matches the ATO CGT worksheet - my spreadsheet is fairly simple.
Basically (assuming indexation is not to be considered) the assets are sorted into 3 categories:
- Losses
- Non-discountable gains
- Discountable gains
Losses are first applied against non-discountable gains
Any remaining losses are applied to discountable gains
Tax at 15% is calculated on any remaining non-discountable gains
Tax at 10% is calculated on any remaining discountable gains
Regards
Neil H.
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MySF Administrator
Group: Administrators
Last Login: 4/11/2010 3:24:01 PM
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Hi Neil,
The statement about there being several ways to calculate this liability figure refers to the fact that a significant proportion of people (accountants included) that we have spoken to simply look at the bottom line increase figure and apply 10% (1/3 discounted figure of 15%) to the unrealised gain figure to calculate the liability. Obviously this assumes that all investments have been owned for at least one year at that moment in time. This assumption can only be correct if the SMSF has not purchased a single investment and has not participated in any DRPs since the end of the previous financial year, which is unlikely. Therefore the 10% rule of thumb can be said to be a common approach that is also likely to be incorrect.
We contend that MySF Manager provides a better result than the above approach.
I also accept that the three bucket approach (gain, discounted gain, loss) would be even better and we will make a change to this approach in a future update.
(If you or other readers of this post have specific information from the ATO on how this liability should be calculated and which approache is preferred then please do post that in response.)
An additional question arises of what to do when the fund's investments have fallen in value and the end unrealised gain figure is negative. In such circumstances the liability could be said to be negative. However, posting the negative liability must cause a commensurate increase in equity. One argument states that this is correct because the ability to claim the loss against gains in future is a positive effect that should be reflected in the balance sheet. However the counter argument states that the end of year reports should show the fund as it is now, and if it were wound up immediately at the end of the year then the equity of members could not include the ability to claim something in future.
We cannot and will not provide a ruling on the above argument. Instead, we work on the base case that if the net increase is negative, then the future tax liability is nil. However, we provide MySF Manager users the ability to modify this figure should they wish to do so.
Disagreements with auditors over whether or not the 10% rule of thumb is acceptable, and whether or not negative liabilities in this case are appropriate can lead to auditors refusing to sign paperwork etc. In the interest of making life easier for our users we will perform calculations and show the results of these calculations as appropriate, but we will allow for the values certain calculations be changed for any reason.
Regards,
MySF
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Master Member
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Last Login: 2 days ago @ 9:53:37 PM
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Hi,
Thanks for the quick reply.
I also accept that the three bucket approach (gain, discounted gain, loss) would be even better and we will make a change to this approach in a future update.
That's great. I look forward to the update.
We contend that MySF Manager provides a better result than the above approach.
Hmmm interestingly, the 10% of bottom line approach would actually have given the correct figure in my two examples - however, I accept that often that would not be the case and I certainly wasn't advocating that approach.
(If you or other readers of this post have specific information from the ATO on how this liability should be calculated and which approache is preferred then please do post that in response.)
No, when I mentioned the ATO method I was referring to their directions for working out actual capital gains - I have seen no info specifically referring to calculating CGT liability - sorry if I implied that.
We cannot and will not provide a ruling on the above argument. Instead, we work on the base case that if the net increase is negative, then the future tax liability is nil. However, we provide MySF Manager users the ability to modify this figure should they wish to do so.
That is perfectly understandable. Personally, I would agree that the future tax liability is nil. Surely the whole object of accounting for future tax liability is to give a more accurate figure for what the member would (and should) actually receive if they were to cash out their benefit. On that basis, if all members were to cash out, CGT on actual gains WOULD have to be paid, whereas capital losses can only be carried forward against future gains - they have no present cash value. Hopefully, I will not encounter an auditor with a contrary viewpoint!
In the interest of making life easier for our users we will perform calculations and show the results of these calculations as appropriate, but we will allow for the values certain calculations be changed for any reason.
That is greatly appreciated!
Regards
Neil H.
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