Market value method
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End of attention
Under the market value method, the amount of FIF income is decided in two steps. The first step works out the movement in the market value of the FIF interest, generally between two annual reporting dates. The second step allows for the deduction of any previous year's FIF losses if the losses have not been used in an earlier year. Working through these steps gives you the amount of FIF income to include in your assessable income.
The following information will help you to complete Worksheet 1 Market value method.
Step 1-Working out the movement in the market value [SECTION 538]
Insert the market value of your interests in the FIF on the last day of the notional accounting period.
Insert the total value of distributions to you by the FIF during the notional accounting period for the interests held on the last day of the notional accounting period. Where you dispose of an interest in a FIF during the notional accounting period, also include the value of distributions made by the FIF before disposal.
Insert the opening market value at the beginning of the notional accounting period of the interests held on the last day of the notional accounting period.
Insert the total cost of any interests in the FIF which you acquired during the notional accounting period and held on the last day of that period.
Usually, you must express the amounts in boxes B, C and D in the currency you used for the amount in box A. [SUBSECTION 538(3)]
However, the market value method provides you with an irrevocable election to use Australian currency in working out all your FIF income. This brings to account currency exchange gains and losses at the time the transactions and values relevant to the determination of FIF income occurred. If you make the election, you must express the amounts in boxes A to D in Australian currency. [SUBSECTIONS 538(4) and (5)]
Exchange rates for FIF values
Use exchange rates applicable on the following days for the market value method
when converting the following to Australian currency
Last day of each relevant notional accounting period for each FIF interest
market value of a FIF interest
Day of each distribution made by a FIF
distribution made by a FIF
Day you acquired the FIF interest
acquisition value of a FIF
Last day of the notional accounting period of the FIF for the relevant income year
excess of FIF income over FIF losses
Last day of the notional accounting period of the FIF in which the loss occurred
Last day of the notional accounting period of the FIF
FIF losses to the same currency as the gross FIF income-not necessarily Australian currency
Take away the sum of C and D from the sum of A and B. This is the FIF amount.
If the FIF amount is positive, that amount represents the gross FIF income of the FIF as it relates to you. [SECTION 540]
If the FIF amount is negative, a FIF loss has occurred. This FIF loss may be used to offset your assessable income, but only to the extent that you have previously been subject to FIF taxation from that FIF-that is, to the extent that you have a FIF attribution surplus in relation to that FIF.
Where there is no FIF attribution surplus the FIF loss must be carried forward to be applied against future gross FIF income of that FIF. You cannot use a FIF loss in relation to one FIF to reduce the gross FIF income of another FIF. [SECTIONS 532 and 541]
Step 2-working out the amount to include in assessable income
Insert the total of any unapplied previous FIF losses. [SUBSECTION 542(2)]
If it is not already the case, you must convert the unapplied previous FIF loss to the same currency as the gross FIF income-that is, the amount in box E. [SUBSECTION 542(8)]
Unapplied previous FIF loss
An unapplied previous FIF loss is the amount by which the undeducted amount of a foreign investment fund loss is more than the sum of any gross FIF income from your interest in a particular FIF. [SUBSECTION 542(6)]
The undeducted amount of a FIF loss referred to above is the amount of a FIF loss that has not been allowed as a deduction from your assessable income. [SECTION 532 and SUBSECTION 542(6)]
You may include losses that arose in relation to the FIF even though one of the following FIF exemptions applied:
Once you have used a FIF loss to work out if there was, for any notional accounting period, an unapplied previous FIF loss, you cannot use that loss again in later notional accounting periods. [SUBSECTION 542(7)]
In working out your unapplied previous FIF losses, apply only that gross FIF income accruing after the notional accounting period in which you incurred the loss and before the current notional accounting period in which you have a gross FIF income. [SUBSECTION 542(5)]
Take away the amount in F from the amount in E. This gives you your FIF income.
Convert your FIF income to Australian dollars at the rate of exchange applying at the end of the relevant notional accounting period. Insert the converted amount at H.
The amount at H is your FIF income. Include it in your assessable income after allowing for a reduction for assessable distributions from the FIF. Read chapter 6 Avoiding double taxation for more information.
Boxes I, J and K
If any of the distributions referred to above are dividends, interest payments or trust distributions, or your FIF interest relates to shares acquired under an employee acquisition scheme-see Reduction of FIF income for FIF interests acquired under an employee share scheme-use I, J and K to arrive at the amount to include in your assessable income. [SECTIONS 530, 530A and 603]
If you are entitled to a reduction of FIF income, add the amount of the reduction to any amount at J.
Determining market value
You determine market value by referring to the quoted market values for the FIF interests. Only quotations from an approved stock exchange will be accepted. See appendix 1 Approved stock exchanges. [SECTION 539]
For FIFs that are not listed on an approved stock exchange, you may use
- a buy-back, offer or redemption price, or
- the price of an offer to purchase a particular FIF by an associate of that FIF.
The buy-back, offer or redemption price must be:
- publicly available
- offered to all persons having an interest of that class in the FIF
- worked out by reference to the market value of the assets of the company or trust
- of an amount that independent parties would accept.
Worksheet 1 Market value method will help you to understand the following examples.
FIF income included in assessable income
The opening value of a FIF interest, at 1 July, was $HK50,000 (C). At the end of the notional accounting period, 30 June, the closing value of the interest was $HK53,000 (A). There were no brought forward losses or acquisitions or disposals during the notional accounting period (D). On 30 April, during the notional accounting period, there was a distribution-interim dividend-of $HK1,000 (B). The FIF amount, as worked out in Step 1 is:
[$HK53,000 (A) + $HK1,000 (B)] - [$HK50,000 (C) - nil (D)] = $HK4,000 (E)
This amount is converted to Australian currency, using the rate of exchange that applied at the end of the notional accounting period, 30 June. If the exchange rate is $A1.00 = $HK5.00, the FIF income is $A800-that is, $HK4,000 divided by 5.
The distribution of $HK1000 = $A200 and is assessable under section 44 of the Act .
Applying subsection 530(1), the FIF income of $A800 is reduced by the amount of the distribution of $A200. Therefore, your assessable income would include $A600 FIF income. 23
Unapplied previous FIF loss
The opening value of a FIF interest was $HK50,000 (C) and, at the end of the notional accounting period, 30 June, the closing value of the interest was $HK45,000 (A). There were no brought forward losses or acquisitions, disposals (D) or distributions (B) during the accounting period. The decrease in market value-that is, the FIF amount-would be:
[$HK45,000 (A) + nil (B)] - [$HK50,000 (C) - nil (D)] = $HK5000 (E)
This FIF loss of $HK5000 may be used to reduce gross FIF income in later years.
Last modified: 08 Jun 2005QC 27386