Tax is not payable in the current period on any unrealised gain and, similarly, no tax “offset” arises in the current period from an unrealised loss. We recommend that super funds carefully examine the most recent valuation of their investment portfolios to identify those assets where the current market value is less than the original cost; and separately identify those assets where the current market value is greater than cost.

This can be a complex process because both types of circumstance may exist within the transaction history of any asset in the portfolio. Having identified these investments they should also be classified by investment class and asset type. There are also other types of taxable loss that a fund can incur and these can create a result which is similar to an FITB. Examples of these types of loss are with assets held as trading stock or on income account (where the current value of the asset is less than its original cost); or where tax credits arising from imputation income may exceed any liability for tax in relation to that income (such as with some dividends paid in

Australia).

A further prescient example is with the significant losses that many funds have recently suffered on their currency hedge positions. Up to 30 June 2008 these losses need to be classified as either “Australian sourced” or “foreign sourced” and this classification will dictate the types of income that they may be able to be offset against. For losses and income derived since 1 July 2008, these rules have been relaxed.

Therefore, the components of any FITB must be recognised separately and correctly allocated against matching types of tax liability, on both a current period realised basis and an unrealised basis. In turn, this means that FITBs should not be valued purely based on their sum total, unless it is certain that in the future, sufficient income can be derived to offset against each constituent part of any FITB. Where your fund uses a master custodian, they should be able to provide this information (at least) as at the end of the previous calendar quarter.

Determining the value of an FITB FITBs generally arise in respect of taxable assets held on a capital basis and therefore they have a “face” value that can be determined as: (CMV – TAOC) x TR = FITB Where: CMV = Current Market Value of the asset TAOC = Tax-base Adjusted Original Cost of the asset TR = Tax Rate applicable FITB = the value by which the fund’s future tax liability may be reduced, if the relevant assets are realised at the current market value. The Tax Rate applicable to the asset will vary according to the tax treatment applied to that asset.

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