Capital consolidation
A company I own shares in recently conducted a share consolidation exercise to return capital to investors. So, for example, if I owned 1000 shares, I received a consolidation dividend of 20c per share ($200,) after which my shares propped to 975 shares. Any suggestions how I can code this in? I though about entering it as a divXFr as the money goes to my bank account, and then doing a sale for $0 with a description, but that seems a bit strange to look at (unless it's the only way.)
Thanks
peter
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1 Posted by Mike Bray (Quot... on 03 Dec, 2018 11:22 AM
Hi Peter
Record the transaction for the dividend into your bank account and give it a category of Dividend. Then enter a sale of 25 shares with a price of zero. This will reduce your holding to the consolidated amount. Then go into the history of the security and make a new price entry to get the correct price (if it is different).
Mike (A user not a member of IK support)
2 Posted by Peter Bowron on 03 Dec, 2018 12:01 PM
Thanks Mike, that’s pretty much as I suggested - it sort of works but is less than neat - I was hoping for a better solution. I’ll see if anyone else has one.
Regards
peter
3 Posted by Mike Bray (Quot... on 03 Dec, 2018 12:09 PM
Hi Peter
Agree, effectively the company is buying back your shares and then selling you some new shares. You could do this as two transactions, i.e a sell of 1000 shares and a buy of 975 that is cash neutral. This would look a bit better.
Mike
4 Posted by dwg on 03 Dec, 2018 07:48 PM
Is the transaction a Dividend or a Return of Capital?
This sounds like part of a recent transactions we had here with a company called IAG
5 Posted by Peter Bowron on 04 Dec, 2018 01:03 AM
Hi dwg,
Yes, it is the IAG transaction set. Although there are 2 “dividends" involved, I’ve recorded the 5.5c one as a special dividend, as the tax ruling on this is fairly simple and deems it as such.
As for the larger amount, the document refers to it as a “capital return” and the decrease in share numbers as a “consolidation ratio”. The interim tax ruling supplied by the Tax Office is, as usual, opaque. It states that the Capital Component is not ordinary income or a dividend (Sect. 25); As I continue to own the shares, CGT event G1 occurred (Sect. 40) and will be eligible to be treated as a discounted capital gain (Sect. 42), but no CGT event occurs as a result of the consolidation. All a bit strange to those of us not lawyers or accountants! On the face of it, on that round figure of 1000 shares, I lose (“sell”) 24 shares and get $195 in return, which would equate to $8.125 per share “sold” and pay the discounted CGT on the difference between $8.125 and the nominal purchase price at demutualisation $2.75. My wife’s account is worse, as she bought some extra 2 years later at $2.40, so will have 2 separate lots to account for!
Have you figured a solution for it?
MIke’s second suggestion looks a little better, but the trouble with this is that had it happened that way, it would definitely trigger a capital gains tax event on the whole 1000 shares, and date the new shares as owned as of now, rather than the many years I’ve held them. I’d prefer a method that reflects what actually happened, or as near to it as possible.
All help gratefulyl accepted
Peter
6 Posted by dwg on 04 Dec, 2018 04:09 AM
Hi Peter.
The final Tax ruling is CR2018/50, it is 23 pages and should cure any known case of insomnia ... :)
I understand the transaction and the ruling, I have an advantage perhaps in that my background is in Economics.
You are correct with the so called special dividend, this is just treated as a normal Franked Dividend and it along with the franking credit just recorded in the normal way in Moneydance.
The 19.5 cents capital component is a return of capital and has the effect of reducing the cost base of the shares given you still own the shares. The ATO ruling really has a long winded way of saying this.
The share consolidation exercise reduces the number of shares on issue, but I think was really done so that the per share price largely remained unchanged following the exercise.
This is my view on how the transaction works.
Processing this transaction in Moneydance is where it gets interesting. Moneydance does not currently have a RoC action, this is something a number of us have been lobbying for, and I'm sure Sean is sick of me mentioning it :).
With it there are a couple of approaches that can be taken, both have problems, so there is no perfect method.
The first approach was recommended by moneydance support some years ago. It basically involves entering a sale for each lot at the original purchase price then entering a buy at the original price less the return amount. finally transferring the total return amount to your bank account.
The numbers come out right but your performance history is trashed.
The other method basically means you cannot use lot matching, you have to set the security to use Average cost. You can then do a sell transaction of 0 shares with the amount of the capital reduction. This reduces the cost basis of the shares (but not on all reports).
Again the number come out as right, but not all reports are correct, and you have to do lot matching outside of Moneydance.
After doing one of the above you then do a Stock split transaction, to change the number of shares you own, but it also will adjust the cost basis. You do this on the basis of receiving .975 shares for each share you own, but given there is rounding involved, and we do not have an action to adjust for this, you generally have to adjust the ratio until you get the right number of shares.
All in all it is a PITA.
7 Posted by Peter Bowron on 06 Dec, 2018 02:02 AM
Thanks for that, I have no problem sleeping that will be solved by reading it. I’ll just need to figure out what if anything I owe the tax office. I would guess that the total amount is treated as a capital gain event, the sale price being the equivalent of $8.125, so my capital gain is $5.375 per share. discount at 50% and pay at my marginal rate. Not something I would have understood, or needed or would have voted for, I’d rather just keep getting the dividends on the normal number of shares. The extra benefit (for me) of the 50% reduction is trivial when you compare a normal dividend + franking credit, certainly not worth the extra time I’ll spend doing my tax next year as my affairs are very simple.
As I have to reenter 20 odd years of dividends over half a dozen shares anyway (because money dance does strange things on ROI unless you do your entries the right way round, which I appear not have done when I got it a year or so ago, I’ll reread what you have said and pick what looks the least bad in my case of what has been suggested (and any other ides that come through,) after I’ve sorted that out. I started with Quicken (free on my original Mac in 2006) and persevered with until in their wisdom stopped supporting anything that ran on their older PPC architecture and I had to upgrade. Moneydance seemed the best , but none was as good, at least for me, and the reviews of Quicken indicated they had “improved” their product by stuffing up existing customers, a not unusual scenario. I don’t think any of the companies do adequate research with real users.
End of gripe. Thanks for your help.
Best wishes
peter
8 Posted by dwg on 06 Dec, 2018 03:45 AM
There need not be any capital gains tax unless the return of capital takes the cost base to less than zero. All the capital return should do is reduce the cost base of your shares in each lot by 0.195 cents per share, I do not see how any investor could have a cost base that low that it would now be less than 0 with this return.
The result should be that the amount of tax paid will be different when you come to sell the shares than if the return had not occurred. For example the initial allocation back in 2000 was at $1.80 per share I believe, after this return the cost base of these shares would be 1.605, this thus affects the CGT when you sell the shares.
The tax in the 2018/19 year would only relate to the special dividend
9 Posted by Peter Bowron on 06 Dec, 2018 05:54 AM
Thanks for that - the blurb from the tax office indicated "40. CGT event G1 happened to an IAG Shareholder when the Distribution was made in respect of an IAG share they owned at the Record Date and continued to own at the date the Distribution was made (section 104-135).” What that means in real life I have no idea, as "44. No CGT event will occur as a result of the consolidation of the IAG Shares (under section 112-25).” Clear as coffee.
reagrds
peter
10 Posted by dwg on 06 Dec, 2018 06:53 AM
Peter,
Yes a G1 or C2 event occurred because capital was distributed, that in itself does not mean that CGT is incurred in the current tax year, the tax impact may be deferred depending on the circumstances.
97-103 expands on this and specifically 99:
"If the Capital Component is not more than the cost base of the IAG share at the date the Distribution is made, the cost base and reduced cost base of the IAG share will be reduced (but not below nil) by the amount of the Capital Component (subsection 104-135(4))."
Des
11 Posted by Peter Bowron on 06 Dec, 2018 11:51 PM
Thanks Des. This is why my background is in science is trumped by your understanding of economics! I’d rather brush up on quantum mechanics than tangle with legislation.
From all of that, it sounds like my best solution as far as moneydance is concerned is to put it in as misc. income, with a note about the G1 event, then “sell” the affected shares for $0. I think that will bring the share numbers into line, and the ROI should be the same. Seems to get more things right with less pain - performance history stays OK, share number ends up correct with less transactions.
If there is a CGT event which is deferred until I sell, then I’ll just keep the shares until I die and let someone else worry about it! I don’t trade in shares anyway.
Regards
peter
12 Posted by dwg on 07 Dec, 2018 12:34 AM
Peter,
Economics and accounting doesn't cause me many problems, and after working in the computer industry for 30 odd years neither do those heaps of !@#$%^&
I've been pushing the developer to implement more investment functions, so I hopeful that we may eventually see improvements. A sell at $0 will probably cause a problem at some stage. your ROI is largely stuffed due to the ROC as you are not changing your cost base.
In your case I can see you want to record transactions as accurately as you can, but without too much overhead and without causing any other problems.
If we assume that a RoC will be implemented at some stage, you could record the transaction in the following way with a view to later amending it.
So you could record the Capital return as MiscInc, with an appropriate memo. If we get a RoC action this is the transaction that would be changed in the future. Do a Xfr to move the funds to your bank account.
To change the share number do NOT do a sell, this is not the way the transaction is working what is happening is a Share Consolidation. Moneydance has a Action for this, it is the stock split, this can handle both splits and consolidations.
It is not well documented, If you open your investment and look at the Securities Detail screen you will see the stock split button, click on it and you get a little window, enter the date and the ratio is 0.975 for 1. Check the number of calculated shares, it may be wrong because of rounding.
Click on the History button, you will see the split at the bottom, you may need to adjust the ratio to get the correct rounding. (I have bought up that we need a way of making small adjustments to share numbers)
Using the Stock split function will ensure that this part of transaction is handled correctly in Moneydance
13 Posted by Peter Bowron on 07 Dec, 2018 06:15 AM
I clearly don’t have a proper accounting handle on ROI. My definition says ROI = (Gain from investment - cost of investment)/cost of investment.
(https://www.investopedia.com/terms/r/returnoninvestment.asp <https://www.investopedia.com/terms/r/returnoninvestment.asp> along with other references)
So I receive 1000 IAG shares at whatever the nominal share price was, for calculation purposes I will assume $1. Cost of investment $1000.
Between then and the consolidation, assume I have received $2000 in dividends (including any imputation credits). so my ROI is (2000-1000)/1000 = 1 (or 100%).
I get a special consolidation return amount of $200, and my share amount drops to 975 shares. My ROI is (2200-1000)/1000 = 1.2
By entering as a sale of 25 share at $0, the gain is correct, the share numbers are now correct.
If at future time I get further gains, or sell my shares, the money I get will be a gain in investment (minus any applicable CGT.) Share numbers do not come into the equation, other than the return I would get would be market price x No of shares (-brokerage and tax), and would be calculated on the number of shares I now have, it is just money in and money out. The tax office don’t care how many shares I own, I get taxed on income, not share numbers/
The consolidation is covered by the consolidation income and balanced by the loss of shares, because that’s effectively what they’ve done: here is a bucket of cash, and you lose 25 shares. I suppose if you wanted to look at ROI/share that would be different, but I haven't worked through the maths of that to see what difference it would make, if any.
What have I missed?
Regards
peter
14 Posted by dwg on 07 Dec, 2018 08:03 AM
There is no income associated with the share consolidation. the monies you have received are in relation to the special dividend and the return of capital, the amounts of these are both based on you number of shares owned at the record date, I do not recall what the date was but it is usually 4-8 weeks before the payment.
The share consolidation occurs after the above events, a company can do these type of events at any time, so what has occurred with the RoC and dividend has no direct bearing on this transaction, the only effect is that we would be working on a different cost base to what it would have been before the RoC. IAG have made it part of the capital initiative in order to achieve their objective of where they want the share price to be, but they didn't have to, they could have done nothing or they could have done a consolidation if they had wanted to in 6 months, 12 months time etc. So the Share consolidation should be handled as if it was a stand alone transaction.
What happens in the share consolidation is that the number of shares is reduced but the cost base of each of these shares is increased, so if we ignore that there is likely to be rounding errors the situation is
Pre consol cost x pre consol share # = post consol cost x post consol share #
So after the event you own less shares but each share is worth more so your total cost stays the same.
15 Posted by dwg on 07 Dec, 2018 08:19 AM
Just to add, doing a sell of 25 shares at 0 cost to adjust the number of shares owned is equivalent to doing a sell of 0 shares for $x to achieve a ROC. Both can give the right result in some respects but not all reports will be correct since Moneydance does not handle such transactions correctly in all cases and such transactions will stop Lot Matching from working.
At the moment there is no ideal way of handling such transactions, just a number of different compromises.
I have taken to using Average cost in Moneydance so I can at least get some data correct and maintain a set of spreadsheets for those shares that have one or more capital returns so that I have lot matching data, if needed.
16 Posted by Peter Bowron on 07 Dec, 2018 12:59 PM
I understood the bit about share consolidation - less shares worth more. Except until I ever sell, I only use it as a marker - in an ideal world, share price and dividends would reflect each other, although in reality the market behaves more like the race track or the casino, IMO. Only if I buy or sell is the price “important”. I’m far more interested in the dividends, I take a very long view on trading. As our two largest shares (NIB and IAG) came about by demutualisation, in one way we paid “nothing” for them, so until we sell and have to pay CGT, the ROI is mathematically infinite. I wish! For practical use, we put in the nominated amount per share on demutualisation. as that was the amount we would have got had we sold immediately.
I have a problem with the stock split - because we have IAG shares in 3 different names - one for me & one for my wife which we received on de mutualisation, and a third which we bought in her name but actually keep for our son, purchased some years later (and thus on a different cost base.)
So when I had to manipulate the stock split ratio for my shares, the rounding factor required to give the correct no of shares for me made the other two incorrect.
So I think I need to do it another way, and sale of shares for $0 may be the best compromise in this case, unless you have another trick up your sleeve.
Also, I couldn’t see anywhere to annotate the share split as a consolidation (seem different to me, and I will forget in the future,) so I’ve had to add considerable notes to the misc inc entry and then the transfer (which I worked out I had to do as a negative number as there was only a single column. Looks massively messy!
I’m unconvinced this is better than my original thought (even if more “correct”, and not sure how badly it will effect any ROI reports anyway - is the gain worth it for me (rather than someone who understands it,) or is the difference trivial (ie if the true roi is 6.00%pa, and the report says it’s 6.02%, I really couldn’t care less as long as the dollar values & share numbers are right. On the other hand, if it’s a difference between 6% and 7%, that is significant.
I also maintain some of this data on a spreadsheet as I had one set up before I even got a banking program that did shares. Allowed me to include the $ value of the franking credits, which has varied depending on where our individual incomes/tax levels have been each year.
I don’t know what Lot Matching is - I might guess from the name, and probably be 100% wrong : > ))). If I don’t know, it may well be unimportant for me.
Thanks
Peter
17 Posted by sprimost on 07 Dec, 2018 01:45 PM
From: sprimost
off-hand, a sell of $0 will be entered in the history of prices. Rather
than get a spike, suggest you clean up the history of prices by deleting
that entry.
18 Posted by dwg on 07 Dec, 2018 08:14 PM
You have found out why I have said we need a transaction type that allows us to clean up small numbers of shares that are the result of rounding. there is not a perfect way of doing this.
Lot matching is critical if you have bought multiple parcels of shares e.g. through Dividend Reinvestment Plans and at some stage only sell part of your share holdings. The ATO insists on you using lot matching when determining your Capital gain - each parcel of shares that you have purchased is a "lot" and when selling you determine which shares from which lots you wish to sell, thus you can structure the Capital gain at the time to be minimized or maximized depending on your tax position at the time, so the ATO insistence is not a bad thing in this case.
The bottom line is that moneydance is missing a few transaction types that would allow us to handle such transactions cleanly, any workarounds are likely to be less than perfect.
This is why I have the spreadsheets with the lot information and use this to adjust the cost base for RoC or share split/consolidations, in the spreadsheet I have to manually adjust the number of shares to whole numbers. I just using average cost in moneydance for companies that have had these transactions so that the totals can be kept right in the software, by doing simple transactions like a sell of 0 shares and an amount to adjust the total cost base for a RoC, you can certainly do the same thing for stock consolidations but with a number of shares and no cost. If you do this then you need to keep good records of purchases, sales, share consolidations and RoC so that accurate information is readily available. I have had company restructures where I have had to use lot information so have had to go back to the core information.
Moneydance has had its share of problems with Investment reports not being correct over the years, i have not been following it that closely so am not aware of the current position as I have not been using Moneydance's performance reporting, I want the software more for record keeping.
19 Posted by sprimost on 07 Dec, 2018 09:38 PM
From: sprimost
So much that said is what I also agree ( or aggrieved!)
Each year I have choice words about investment reports that only give half
or less of information, such as dividends paid in cash vs reinvestments. I
spend more time creating spreadsheets of fourth quarter activity to
determine what to pay in estimated taxes looking at actual register entries
or multiple run of the same report by different criteria. Or else spend
reverse time on those darn tags.
Time to write my own python extension! It can't be that difficult once I
can get through figuring out the odd manner of the organization of the data
20 Posted by dwg on 08 Dec, 2018 12:44 AM
In my view people who own investments need to be far more vocal far more often than they are in these forums about moneydance's shortcomings in Investment handling.
The squeaky wheel tends to get more attention and the noisy wheel that sounds like it is about to fall off tends to get even greater attention ....
What I really would like is a once and for all effort to fix up investments, its not like the necessary actions and reports change, Quicken hasn't changed anything in this space for years, if not decades.
Once the basics are there then if someone does have some unusual requirements an extension would be a good path to take.
21 Posted by Peter Bowron on 08 Dec, 2018 12:19 PM
OK, Lot matching actually was what I thought it was. It will not (as yet) affect my shares from IAG, but will affect that extra packet my wife brought. She has a minor carried forward capital loss from a similar incident (but from a (badly) managed fund.) If it comes to selling, I’m aware of that issue. It would be all a lot simpler if income was income and treated the same. Could probably get rid of 80% of the tax office too. And a world of lawyers - no offence intended - we have 3 lawyers in the family!
I’ll have another got at various suggestions, including the comment from sprimost, and figure out what works best for me. Will repost when I get an answer, which may not be best for anyone else. Certainly won’t relay on Moneydance for encounters with the Tax office, other than recoding when I made a particular transaction.
Thanks for all the help.
Regards
peter
22 Posted by dwg on 09 Dec, 2018 10:03 AM
Peter,
I have been thinking about the share consolidation. I think we can get it close using the standard Moneydance way, with a little non standard transaction at the end for the cleanup. In the main the approach is what Reckon takes but they have Add/Remove share transactions whereas Moneydance does not, if they were to introduce such a transaction then this means the change to one transaction was all that would be required to bring it inline.
We know that IAG use a consolidation ratio of 0.975 to 1. I'm thinking of entering a Moneydance stock split using these numbers, you will likely get a fractional number of shares, but I would adjust this, and I think IAG rounded all shares up, by doing a buy transaction for the fractional difference, to get to the whole number, at $0 cost - this is where Reckon would do an Add transaction.
23 Posted by Lu Feng on 16 Dec, 2018 03:56 PM
OP: "I though about entering it as a divXFr as the money goes to my bank account, and then doing a sale for $0 with a description ..."
Isn't this fundamentally wrong -- in the sense your records would suggest 1) you owe tax on div income and 2) you also have a realized capital loss? Of course, both are bogus.
To get (almost) all the tax implications correct, I think you would have to "sell" your 1000 shrs at their current cost basis. Then "buy" 975 shrs at $200 less. If you have N different lots for your 1000 shrs, then you have to have N such "sell" transactions, each at its cost basis. (If you just do a single "sell", your records will imply gains on some lots and loss on others, and hence also "wash sale" for your "buy" of 975 shrs.)
The above is still not 100% correct. If you should sell some of the 975 later within one year, your records may mistakenly suggest short-time gain/loss.
24 Posted by dwg on 16 Dec, 2018 08:30 PM
Lu Feng,
The IAG initiative yields two activities as far as our records are concerned. There is a Dividend components which is taxable in the current year as would be expected, this can be entered as you usually would, in Australia there are two types of Dividends so we have to have separate categories for reporting purposes. There is also a capital return which impacts the cost basis of the shares owned.
It is handling the Capital Return that causes most of the pain - One thing that Moneydance users need to be aware of is that the action types are not as narrow as in other programs, For example in Reckon a transaction entered as a dividend has to be a dividend and it will be categorised as such, in Moneydance a Dividend can be any income received on an investment, what it is is depended on the category you assign it to, this is a fundamental difference from many other programs. Transactions like DivXfr can also be used to record amounts that you need to report to authorities that are not $$ amounts to you, you can achieve this by using categories on both sides of the transaction. This is how I enter details for Tax reporting of mutual funds, which is quite different to distributions received.
Entering transaction like Buys and sells with either a zero amount or a zero number of shares, while it only works if you have set your security to Average Cost, acts to change the total Investment basis in some way. If you enter a 0 number of shares and a total amount in many places will show as reducing the costs basis of your shares, so it gives the effect of a return of capital. Entering a number of shares with a 0 amount acts to reduce the number of shares but keeps the total cost the same so it presents as a share consolidation. Moneydance does have a stock split function so it can do share consolidations to a degree but it has no real mechanism to handle rounding which you need to adjust most of the time.
So in terms of totals what is in Moneydance represents your overall position, where it falls down is that it does not have the detail that is needed when it comes to maintaining cost basis for lots when there are changes caused by these transactions.
Capital gains can get real interesting here on any lot a capital gain falls into 1 of 4 categories, it makes the original purchase date a critical piece of information as well as the sale date. IAG can only fall into 2 of these categories. I know of no software that handles this (and it gets worse which how gains are calculated) so all I want software to do here is present good reports on the lots when they were purchased and their cost basis as well as the sale amount received.
System closed this discussion on 17 Mar, 2019 08:30 PM.