GST consequences hit home

WHEN the legislation giving effect to the New Business Tax System (Integrity and Other Measures) Act 1999 was passed by Parliament in December 1999, no-one in the funds management industry had foreseen anomalous implications for the cost bases of investor units in managed funds.

An investor who invests directly in the Australian stockmarket will be assessed on 50 per cent of the capital gain that accrues.

For example, if an investor buys a parcel of shares for $1,000 which subsequently increase in value to $1,400 will be assessed for tax purposes only on $200, provided the shares are held for at least twelve months.

Likewise, managed fund investors will be assessed on 50 per cent of the capital gains distributed by a fund manager, assuming that the asset has been held by the managed fund for at least twelve months.

However, because of the 50 per cent concession provided on these gains, the legislation requires the investor to reduce their cost base by the 50 per cent of the distributed capital gain that is not assessable.

Effectively, this means that the investor is likely to be assessed on 75 per cent of the total gain made.

For example, an investor invests $1,000 in a managed fund, which then acquires shares to that value.

The fund holds those shares for twelve months during which time they rise in value to $1,400.

The fund disposes of the shares and distributes the total gain to the investor.

Of the gain distributed to the investor, $200 is assessable and $200 is a non-assessable gain.

The $200 non-assessable gain reduces the cost base of the investor from the original $1,000 to $800.

If the investor were to dispose of the units at this time, he would be assessed on a further $100 (50 per cent of the difference between the original $1,000 and the new cost base of $800) as having already been assessed on the $200 of distributed capital gain.

Effectively, the investor in the managed fund has been assessed on $300 whereas the direct investor has only been assessed on $200.

The funds management industry has sought written confirmation that this anomaly is only applicable up to 1 July 2001. They are still awaiting a response.

It is hoped that this is not another of those unintended consequences that the government has chosen to conveniently ignore because it will be revenue beneficial.

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