Re: Octaviar MFS Premium Income Fund PIF
Thanks but I don't follow. I'll just try calling WC AND the ATO for an answer - AGAIN.
Well, my meaning is:-
(assuming the fund is damaged with severe losses which are never going to be recovered.)
I think that the proper meaning of the word 'distribution' is a 'distribution of profit' - each member receives, on a pro rata basis (according to his/her unit holding) a share of that profit.
Under normal circumstances, that is, in a liquid unlisted fund, each member is entitled to redeem his/her capital directly from the fund - the reward for making the investment is being paid a distribution (or share of the profit).
So, if no profit is made, then no distribution is able to be made. Actual losses and impairments must be taken into account when calculating profit. So, if losses and impairments cannot be overcome, then no profit is realised, and therefore no distribution can be paid (there is no share of profit).
However, payments of redemptions can be made in the case of non-liquid unlisted fund but only to the extent of any surplus cash in the fund. There is no tax consideration - investors are merely getting some of their investment back.
In a unlisted fund, if a manager attempted to pay members capital as distributions (in the circumstances with such losses and impairment), then that manager would clearly breach the Tax Act.
So, no income, no profit, no distributions.
Now, if one consider the PIF as listed, then clearly one might assume the situation to be the same, that is, distributions would not be able to be paid because the fund's losses could not be overcome in order to make a profit - so, no profit, no distribution.
One might further assume that one is entitled to redemptions.
But the foregoing is not true of a listed fund, members are no longer entitled to be paid a share of profits (that is, no longer entitled to be paid distributions' in the ordinary sense of the word - a share of profits).
Your manager defines distributions (Page 74 of the memorandum) as:-
"... Calculation of Distribution Entitlement
Calculation of distributable amount
The ‘distributable amount’ for a distribution period is to be determined in accordance with the
following formula:
DA = I + C
Where:
DA is the amount of distributable amount;
I is the income of the Fund for the distribution period minus any amount of the income that is set aside during the distribution period as reserves or provisions under the Constitution; and
C is any additional amount (including capital, previous reserves or previous provisions) that the responsible entity has determined during the distribution period is to be distributed. ..."
Really, "I" more or less equals net profit - since the provisions will be the fund's ligitimate expenses.
So, before in the unlisted environment where the Tax Act would prohibit capital being repaid as distributions, now that the fund is listed, capital is able to be paid as a 'distribution'.
This means, an investors capital is able to paid (as a fund expense, that is, 'cost of capital') to investors as tax assessable income ("distributions").
I think it is misleading to use the word 'distribution' in circumstances whereby capital is being repaid to investors and those investors will be required to add any 'distribution' amount to any taxable income. Many investors think that distributions and 'distributions' are the same, but they are not.
In fact, in the PIF, only capital is capable of being repaid as 'distributions' because there is no income to generate profit (because of the huge losses and impairments). The formula for the PIF is in fact "D = 0 + C" (since there is no income, I = 0).
If one wants to look to a specific example of the difference, then one has only to look to "Calculation of Distribution Entitlement" (Page 74 Memorandum).
So, if we look to page 59 of the memorandum, the manager states:-
"... 6.4 Cash payments
The responsible entity intends to make cash payments to Unitholders totalling 3 cents per Unit with the first payment to be made in October 2008, the second in December 2008 and thereafter quarterly.
Due to the significant impairment recognised at 31 May 2008 it is anticipated that the cash distribution will be a capital repayment and tax deferred. See section 9 in relation to taxation issues. ..."
Given the state of the fund (that is, the massive losses and impairments), one would think that a capital payment (tax deferred) would be order, but that's not how it's panning out either:-
In a letter to a unit hoder, the manager stated (in part), "... at this time we have been provided with guidance in relation to whether the cash payment will be in the form of a capital return or distribution ..."
It seems that the waters are a lot muddier than one might think. The manager now requires 'guidance' before any payment is to be made. My guess is that the 'guidance' is coming from the ATO, and there are going be a heap of folk more than a little disappointed when they their first payments (if they in fact do receive a payment).
I should also point out at page 9 of the Memorandum:-
"... Tax Deferred that component of cash payments from the Fund that are not taxed. .."
My view is that this means capital payments made from the fund as NOT taxed by the fund, so investors will stand to deal with taxation on such payments on an individual basis.
Again, s. 601FC(1)(d) requires all unitholders to be treated equally - if some tax, and other don't, then are they being equally. I really don't know the anwer to this one.
So, I hope that gives you an insight to my twisted mind.
Thanks.
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