During the market’s boom years, trustees only had to worry about minimising capital gains tax liabilities and maximising franking credits to assure a good after-tax performance for their fund. But with the concept of ‘gains’ long gone, and dividends on their way down too, harvesting losses is suddenly the name of the game. This article, by DREW VAUGHAN of administration consultancy Dymonds Foulds

Vaughan, is intended to increase discussion about issues surrounding the inclusion of future income tax benefits (FITBs) in unit price calculations.

Why FITBs have come to the fore In the period since June 2008 investment markets have fallen substantially in value. These falls have affected investment markets across all “growth” asset classes. The extent of the fall in value of many investment assets held by super funds is now so great that the current market value of those assets is less than the original “cost”. In other words, funds are carrying forward significant “unrealised losses” on the value of their investments and these losses are being reflected in financial statements as well as through the regular unit prices of the fund’s investment options.

When funds carry forward either actual or net unrealised losses, these losses may also result in a net unrealised tax loss which may be able to be carried forward for offset against future capital gains tax liabilities or future unrealised gains. A net unrealised tax loss that is able to be carried forward to offset against a future capital gains tax liability is described as a Future Income Tax Benefit (FITB). FITBs represent an asset, albeit theoretical, of the fund. For funds that calculate unit prices on a daily, weekly or monthly basis, FITBs need to be included as part of the net asset valuation from which the unit prices are derived.

However, because of uncertainty about being able to access the FITB at a time in the future; the difficulty in determining a true value for the FITB; as well as the irregularity with which FITBs can occur; there has been considerable debate in the superannuation industry about how FITBs should be valued and included in unit price calculations. There are three fundamental issues that need to be considered in relation to FITB’s.

These are: • Identifying if an FITB has arisen in your fund; • Having identified an FITB, how to determine its value; and • How to allocate, equitably between members, any value ascribed to the FITB. Identif ying if an FITB has arisen in your fun d An FITB can arise when the current market value of an asset is less than the original cost of that asset. This loss is “unrealised”, for both accounting and tax purposes, until such time as the asset is sold or otherwise realised.

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