Trial Balance does not include amount of Return of Capital Investment splits

[Chris Good]

From: John Ralls [mailto:jralls at ceridwen.fremont.ca.us] 
Sent: Tuesday, 16 May 2017 2:05 PM
To: Chris Good <chris.good at ozemail.com.au>
Cc: GnuCash User Mailing List <gnucash-user at gnucash.org>
Subject: Re: Trial Balance does not include amount of Return of Capital
Investment splits

 

 

On May 15, 2017, at 8:42 PM, John Ralls <jralls at ceridwen.fremont.ca.us
<mailto:jralls at ceridwen.fremont.ca.us> > wrote:

 


On May 15, 2017, at 7:41 PM, Chris Good <chris.good at ozemail.com.au
<mailto:chris.good at ozemail.com.au> > wrote:

Hi,



I'm airing this before I raise a bug.



I've noticed that if you do a Return of Capital transaction [1]

I.e. Stock split with Shares=0, Price=0, Sell=Return of Capital value,

the Trial Balance no longer balances by the value of the Return of Capital.



The stock line value in the report does not include the Sell value of the
RoT split.



Can anyone throw any light on this?



The Balance sheet also shows the incorrect asset value of the stock, but it
still balances

because it (incorrectly?) also shows Unrealised Gains in Equity with the
value of the RoT.



[1] https://www.gnucash.org/docs/v2.6/C/gnucash-guide/invest-retofcap.html



Regards, Chris Good


A return of capital when booked that way creates an unrealized capital gain:
You have the same number of shares but a lower basis. You can either
recognize the capital gain or find a different way to record the RoC.

 

It occurred to me that I should explain that a bit more fully.

 

The original buy transaction sets the basis, and any transaction that
changes the balance of money<->shares will affect the trial balance, so you
need another pair of splits that adjusts Equity to compensate, just as you
do when you sell a security.

 

Under US tax law (the only flavor I know anything about) RoC reduces the
basis so that taxes on it are deferred until one sells the asset

and furthermore are at the (much lower) capital gains rate. There may be
other benefits as well depending on the industry the company is in; those
companies generally issue special tax documents (called "K-1s" in the US)
that are a serious PITA to deal with. Most of the tax advantages other than
the deferment are useful only to people in high tax brackets, so that sort
of investment generally makes sense only to that sort of investor and makes
no sense at all (except maybe diversification) in tax-deferred accounts like
retirement accounts. The rules are likely different in other jurisdictions,
so investors should study up and seriously consider consulting an accountant
before investing.

 

Anyway, if your jurisdiction allows you to reduce the basis of the
investment instead of immediately recognizing the income then you'll want to
set up a non-taxable income hierarchy with a "returned capital" account in
which to recognize the income and to get your trial balance to balance.
You'd otherwise treat it like any other capital gain/loss.

If your jurisdiction doesn't allow you to defer recognizing the income by
reducing the basis then an RoC is just a dividend with a funny name and you
should book it accordingly.

 

Regards,

John Ralls

 

Hi John,

 

(Sorry about wrong abbreviation RoT I used previously when I meant RoC)

 

Thanks very much for your input. Interesting to hear about US tax law.
Australian tax law seems similar, at least as far as recording in GnuCash is
concerned, but not as complicated thankfully.

My RoC transactions are actually to do with a stock split where the value of
one stock is reduced, but not the no of shares, and a no of a different
stock are created for the same value. In my very limited, inexpert
investment experience, the Aust Tax Office has made a ruling shortly after
the split, detailing what the cost of the shares involved should be.

 

Using the RoC transaction to reduce the original shares works fine with the
Advanced Portfolio Rpt, but not with the Trial Balance, which makes using
the TB to validate the correct capital gain/loss value of other sales more
complicated than it should be.

 

I tried everything I could think of to add another pair of splits that
adjusts Equity as you suggested, but could not find anything that ends up
with the right figures in all accounts and a balancing Trial Balance. Could
you please give more detail?

 

As the RoC transaction seems to be a problem, I thought that instead of
doing a ROC, I would sell all the stock at cost (so there is zero gain/loss)
and then buy all for the new cost but this comes up with a TB I don't
understand at all. E.g.

 

(Trading Accounts not on, and only 1 currency used, GnuCash 2.6.16, Windows
10)

 

Tx 1 01/07/2016 Opening Balance

$1000 DR Assets:Current Assets:Bank1

$1000 CR Equity:Opening Balances

 

Tx 2 01/08/2016 Tfr Bank to Brokerage

$500 DR Assets:Investments:Brokerage1

$500 CR Assets:Current Assets:Bank1

 

Tx 3 02/08/2016 Buy 500 Stock1 for $1 Ea

$500 DR Assets:Investments:Brokerage1:Stock1 (Shares 500,  Price $1)

$500 CR Assets:Investments:Brokerage1

 

Tx 4 03/08/2016 Dummy Return of Capital - Sell all at Cost

$500 DR Assets:Current Assets:Bank1

$500 CR Assets:Investments:Brokerage1:Stock1 (Shares -500,  Price $1)

 

Tx 5 03/08/2016 Dummy Buy all shares at reduced cost

$400 DR Assets:Investments:Brokerage1:Stock1 (Shares 500, Price $0.80)

$400 DR Assets:Current Assets:Bank1

 

The Trial Balance as at 3/8/2016 (Commodities Price Source: Nearest in Time)
shows:

 

$600 DR Assets:Current Assets:Bank1

$500 DR Assets:Investments:Brokerage1:Stock1      Expected $400

$1000 CR Equity:Opening Balances

$50 CR Unrealized Gains
Expected $0

 

DR Total $1,100

CR Total $1,050

 

Am I misunderstanding?

 

Regards, Chris Good

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