Equitable allocation of the value of an FITB We discussed earlier that FITBs arise in respect of certain types of assets; and that the future offset of an FITB must be against taxable capital gains for equivalent asset types. These two factors mean that trustees must ensure that the value of an FITB can be correctly determined and fairly allocated across their fund’s investment options related to the type of assets that generated the original FITB. The process for allocation of an FITB is not straightforward.

At its simplest, the allocation today of an FITB that arose from transactions in previous periods may mean that we will be allocating to members in different proportions than would have been the case if the allocation had been undertaken at the same time as the FITB was originally generated. We know that it will not be possible to allocate FITBs as soon as they occur, because the information that will inform us about the FITB, most likely, will not be available from the custodian for some weeks or months after the end of the month or quarter in which the FITB was generated.

This is a problem all funds face. What many funds do in such cases is that they determine a breakdown of the FITB by asset and tax type and then allocate the amounts within the asset classes for each investment option. Whilst this can’t allow perfect alignment between the generation of the FITB asset and member entitlements it will, provided that the allocation takes place on a regular and ongoing basis, mean that any allocation difference should be relatively small. The availability of this information dictates the timing that should apply to identifying the existence of an FITB and then the earliest time from which any determined value for the FITB should be allocated and included in unit prices.

Most unit pricing models available in the Australian marketplace allow provisions for tax liabilities (arising from net realised and unrealised gains) to be provided in unit price calculations. When an FITB exists, the fund will need to establish a provision for a tax “asset” in the unit price calculation to reflect the existence of the FITB. Other issues funds face with their tax information include limitations with the timing and accuracy of intra-year dividend and income distribution data received for the funds’ investments; revisions of tax liability (or FITB) positions with subsequent transactions as more efficient and accurate tax lot allocation models are used by custodians and funds; and adjustments for changes in deductible operating expenses and changes in proportional allocations of income as fund pension sections grow.

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