From: John Ralls [mailto:[email protected]] Sent: Tuesday, 16 May 2017 2:05 PM To: Chris Good <[email protected]> Cc: GnuCash User Mailing List <[email protected]> Subject: Re: Trial Balance does not include amount of Return of Capital Investment splits
On May 15, 2017, at 8:42 PM, John Ralls <[email protected] <mailto:[email protected]> > wrote: On May 15, 2017, at 7:41 PM, Chris Good <[email protected] <mailto:[email protected]> > 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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