[GNC] Tax Accounting for Trust Income Received in Following Fiscal Year

[john]

> On Aug 11, 2022, at 6:06 AM, flywire <flywire0 at gmail.com> wrote:
> 
> It's tax time again and I'm wondering if I can improve on the process I
> described in
> https://lists.gnucash.org/pipermail/gnucash-user/2021-August/097424.html
> 
> It works and keeps my accountant happy but it just doesn't seem to sit well
> with double-entry accounting to just ignore a few accounts at tax time and
> slip in a funny-money cheat sheet for ETF (Mutual Fund?) investments. I'd
> welcome any suggestions for a better way of doing it.
> 
> Attached is an ETF statement. The total of each of the 10 Tax codes in the
> top section for all ETFs is reported in the attached guide on p4.
> 
> The Cash distributions are on the bottom left and the Attribution is on the
> bottom right don't match. I understand the issue is summarising different
> tax treatments for Dividends, Franking credits, Realised capital gains,
> Interest, and Foreign Income categories. I'd prefer to enter what is
> relevant into GnuCash but I don't understand the accounting. I also
> understand there are different ways of accounting for tax but any guidance
> would be welcome.
> 
> I don't want to get into the detail of setting up an investment portfolio
> as explained in the guide and I can't see that it addresses this issue. I'd
> be happy to revalue the few funds at the end of each tax year (with
> guidance) for the balance sheet.
> 
> This should feed into the financial statements for the trust which owns the
> ETF units and distributes the proceeds each year. The Cash distribution has
> been distributed with pro-rata funny-money reported.
> 
> [image: VAS-annual-tax-statement-2018.png]
> 

Nobody here is qualified to give you either accounting or tax advice. You need to hire one or more locally licensed professional advisors to guide you.

With the disclaimer out of the way, I guess it's down to what you have to report on your taxes. In the US neither an ETF nor a mutual fund (a Registered Investment Company or RIC in the US tax code) would give you a breakdown like that. In both cases the only tax event that either generates are periodic dividends. Those come in 4 flavors and one can simply set up an income account for each flavor. These instruments all represent a corporation that is responsible for filing and paying its own taxes so the internals are opaque to the investor just like common and preferred stock holders.

Then there are pass-through entities. These may be small corporations in which the investor is actively involved or some flavor of partnership. There are very large partnerships called Master Limited Partnerships that trade on the stock exchanges. A lot of these are structured so that the periodic payouts are called "returns of capital" until the nominal basis of one's holdings is exhausted; in US tax law these reduce one's basis in the investment increasing the capital gain when the investment is liquidated but accruing no tax in the meantime. All of these pass-through entities report to the investors annually their share of the company's/partnership's internal results: Revenues, expenses, special tax items, etc. and those amounts are applied to the investors tax return. I don't think that it's sane to try and track those amounts in one's personal accounts. Transfer the numbers into your tax software or include the forms in the bundle you send to your tax preparer and be done with it.

Much less common than any of those is the investment pool, sometimes marketed as a "Managed Portfolio", generally as a way for banks and brokerages to extract more fees from trusts and high net-worth clients who otherwise pay a fixed percentage of their portfolio as an annual fee in lieu of commissions on trading. They typically have exorbitant management fees, often more than 5% compared to the .5-1.5% for actively-managed mutual funds or .1% and less for ETFs and index funds. These vehicles can invest in all manner of things and generally pay no taxes themselves, handing off the investors share of every income category to add to their own tax returns. The statement that you posted looks like it might be from one of these. As in the MLP case I don't think it's practical to try and set up accounts in your own books matching the investment pool's holdings. It's too hard. Make an income account for the gross payouts and leave the tax reporting details in your tax software or tax preparer.

Regards,
John Ralls