ETF Deemed Disposal Worked Example

tullaman

tullaman

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When I started reading up and figuring out exactly how deemed-disposal worked and what difference it would make if there was an ETF exit tax of 41% but without the deemed disposal bit, I still found it tricky to follow.

It's ok to figure out if you just pay the tax from cash external to the ETF but where you liquidate some of the ETF itself to meet the deemed disposal bill it gets tricky. But that is the correct like-for-like comparison.

So this is a worked example of what I *think* happens it that sell-to-pay-tax scenario. 1000eur initial investment, 10% growth pa. NDD (No deemed-disposal) is the scenario without deemed disposal for comparison.

Comments, clarifications welcome.

Orig. Invest: DD Value: 1000, NDD Value: 1000
Year 1: Return: 10%, DD Value: 1100, NDD Value: 1100
Year 2: Return: 10%, DD Value: 1210, NDD Value: 1210
Year 3: Return: 10%, DD Value: 1331, NDD Value: 1331
Year 4: Return: 10%, DD Value: 1464, NDD Value: 1464
Year 5: Return: 10%, DD Value: 1611, NDD Value: 1611
Year 6: Return: 10%, DD Value: 1772, NDD Value: 1772
Year 7: Return: 10%, DD Value: 1949, NDD Value: 1949
Year 8: Return: 10%, DD Value: 2144, NDD Value: 2144
Year 8: DD Tax: (2144 - 1000) @ 41% = 469 less taxes paid to date of 0 = 469 ***
Year 8: DD Value 1675 (Orig. Value: 781. Tax Paid: 366) ***

It's not broken out as such but in year 8 469euro worth of the ETF are sold. Some of that money goes to paying the exit tax for the "units" sold and the remainder to the deemed disposal. For the purposes of future years' calculations it as if the sold units are gone - because of course they are - we just sold them to meet a tax bill. Anyway I hope my thinking is clear.

Year 9: Return: 10%, DD Value: 1842, NDD Value: 2358
Year 10: Return: 10%, DD Value: 2026, NDD Value: 2594
Year 11: Return: 10%, DD Value: 2229, NDD Value: 2853
Year 12: Return: 10%, DD Value: 2452, NDD Value: 3138
Year 13: Return: 10%, DD Value: 2697, NDD Value: 3452
Year 14: Return: 10%, DD Value: 2967, NDD Value: 3797
Year 15: Return: 10%, DD Value: 3264, NDD Value: 4177
Year 16: Return: 10%, DD Value: 3590, NDD Value: 4595
Year 16: DD Tax: (3590 - 781) @ 41% = 785 less taxes paid to date of 366 = 785 ***
Year 16: DD Value 2805 (Orig. Value: 610. Tax Paid: 900) ***

What I've read seems to say that the DD tax is calculated on the gain from the very start with a credit for the tax paid in previous DDs.

Year 17: Return: 10%, DD Value: 3085, NDD Value: 5054
Year 18: Return: 10%, DD Value: 3394, NDD Value: 5560
Year --: NDD* Exit Tax applied: (5560 - 1000 @ 41%) = 1870
Year --: DD Exit Tax: (3394 - 610) @ 41% = 1141 less taxes paid to date 900 = 241 ***
Year --: DD Value: 3152, NDD Value: 3690
Year --: DD CAGR: 6.59, NDD CAGR: 7.52

With AAM's help, if I can get this correct then I'll do a scenario where there is a loss in one of the deemed disposal periods.

Thanks for any comments.
 
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That's correct. It helps to keep track of the specific number of shares (units) in the ETF and the price per share/unit.

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Thanks Corola. Apologies I reposted this on your ETF key post - I thought there was some glitch where the post didn't go up. I only saw the inbox msg later.

Here is another scenario but with a negative return on the second 8 years. I thought this would be very bad under deemed-disposal but actually DD works out better here. I guess selling at the top of the market works out well whether you timed it right or if only because the tax-man forced you.

Orig. Invest: DD Value: 1000, NDD Value: 1000
Year 1: Return: 10%, DD Value: 1100, NDD Value: 1100
Year 2: Return: 10%, DD Value: 1210, NDD Value: 1210
Year 3: Return: 10%, DD Value: 1331, NDD Value: 1331
Year 4: Return: 10%, DD Value: 1464, NDD Value: 1464
Year 5: Return: 10%, DD Value: 1611, NDD Value: 1611
Year 6: Return: 10%, DD Value: 1772, NDD Value: 1772
Year 7: Return: 10%, DD Value: 1949, NDD Value: 1949
Year 8: Return: 10%, DD Value: 2144, NDD Value: 2144
Year 8: DD Tax: (2144 - 1000) @ 41% = 469 less taxes paid to date of 0 = 469
Year 8: DD Value 1675 (Orig. Value: 781 with Tax Paid: 366)
Year 9: Return: -10%, DD Value: 1507, NDD Value: 1929
Year 10: Return: -10%, DD Value: 1357, NDD Value: 1736
Year 11: Return: -10%, DD Value: 1221, NDD Value: 1563
Year 12: Return: -10%, DD Value: 1099, NDD Value: 1406
Year 13: Return: -10%, DD Value: 989, NDD Value: 1266
Year 14: Return: -10%, DD Value: 890, NDD Value: 1139
Year 15: Return: -10%, DD Value: 801, NDD Value: 1025
Year 16: Return: -10%, DD Value: 721, NDD Value: 923
Year 16: DD Tax: (721 - 781) @ 41% = 0 less taxes paid to date of 366 = -366
Year 16: DD Value 721 (Orig. Value: 781 with Tax Paid: 366)
Year 17: Return: 10%, DD Value: 793, NDD Value: 1015
Year 18: Return: 10%, DD Value: 872, NDD Value: 1117
Year --: DD Exit Tax: (872 - 781) @ 41% = 37 less taxes paid to date 366 = -329
Year --: DD Total Tax: 140 (469 + 0 + -329)
Year --: NDD Exit Tax applied: (1117 - 1000 @ 41%) = 48
Year --: DD Value: 1201, NDD Value: 1069
Year --: DD CAGR: 1.02%, NDD CAGR: 0.37%
 
That's interesting, and unintuitive.

When returns are positive, deemed disposal means you lose out on the growth of the units that you sold.

But when returns are negative, the units you sold have been sheltered from subsequent losses, yet you still carry the credit for tax already paid to offset in the future. The remaining -€329 can be reclaimed from Revenue when you finally sell, so you end up better off than without deemed disposal.
 
It would be most unusual for any broadly-based equity ETF to return negative results after 8 years

Obviously, if you are investing in a exotic ETF based on some exotic investment (for example apartments in Ouagadougou, Burkina Faso) then you could be in for a surprise
 
Corola said:
the units you sold have been sheltered from subsequent losses,
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My LAET investment turned 8 a while before Trumps shenanigans started. There was an edit tax rebate showing up on the value for a while at the start of the year. Back in positive territory now, so it's back to showing an exit tax deduction.

A big difference between LAET deemed exit tax and ETF deemed exit tax is that the policy is looked at as one entity, with the 8 year anniversary of the policy being the triggering event for deemed disposal, rather than each purchase being looked at in isolation.
 
In this case there is only one purchase of the ETF so the anniversary is the same as a life assurance policy. The first scenario with positive returns would be the same between ETF tax and LAET.

I'm not sure how the "adding back the tax" part would work in the LAET calculation when the tax is a rebate rather than a deduction – I imagine the second scenario with negative returns would be different due to the timing of the refund.
 
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jpd said:
It would be most unusual for any broadly-based equity ETF to return negative results after 8 years
Click to expand...
Not that unusual. Anyone investing in MSCI World between Nov 1999 and May 2002 experienced this.
 
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Someone who invested in a fund between those two dates saw a negative return at the eight-year deemed disposal anniversary.
 
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