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Old 24.05.2011, 09:37
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Bonds/Investment funds on your tax return

Was gathering the info for our tax return and ran into a bit of a schocker. Would appreciate it if someone could confirm that I'm not missing something here...

Lets imagine you decided during the financial crisis to put some money into government bonds (Swiss, German, whatever as long as its 'safe') that expire in one year.

Lets say the bond was originally issued for 100, with 3% interest. But due to the flight-to-safety, it traded at 102. So you accepted that at the end of the year you make 1 (being 3 in interest, less a capital loss of 2 as you'll get only 100 back rather than the 102 invested).

All sounds cool, you have made a 'guaranteed' 1% or so. However on your tax return, the Swiss tax authorities require you to declare the interest received - i.e. 3.

So you end up paying income tax on interest received of 3. This near enough wipes out the gain of 1 completely...! And it totally ignores the capital loss that you made knowingly as a trade-off for the interest received.

This seems about as illogical as you can get. I can understand that the Swiss system taxes interest/dividends, and not capital gains/losses. However if you invest in a product that is a combination of these two, then it makes no sense whatsoever to pretend to split the product return into an interest component and a capital gain component.

The same problem applies to investment funds. You are supposed to get a tax statement from them each year, showing the notional interest/dividends received within the fund, then you pay tax on that. So you should try to avoid funds which actively make a capital loss in return for an interest/dividend gain. But I have never seen any investment advisor talk about funds in this way.

Anyone with experience of this that they can share?
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Old 24.05.2011, 09:40
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Re: Bonds/Investment funds on your tax return

Yeah but if it had gone the other way they wouldn't have taxed your gain either. Doesn't seem illogical at all really - if you'd have know about this (you could have just asked) before, maybe you'd have put your money outside a crummy bond product. Anyway, best of luck.
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Old 24.05.2011, 09:46
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Re: Bonds/Investment funds on your tax return

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Yeah but if it had gone the other way they wouldn't have taxed your gain either. Doesn't seem illogical at all really - if you'd have know about this (you could have just asked) before, maybe you'd have put your money outside a crummy bond product. Anyway, best of luck.
So do investment advisors actually point this out? I've never heard anyone do so, or seen it advertised/discussed. And why do such products even still exist... if no-one would want them.
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Old 24.05.2011, 09:55
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Re: Bonds/Investment funds on your tax return

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So do investment advisors actually point this out? I've never heard anyone do so, or seen it advertised/discussed. And why do such products even still exist... if no-one would want them.
Firstly because a stand alone bond isn't a structured retail investment product - those who buy them understand them and are able to price them correctly, invest as much for capital gain as for income, know which of the two is more likely, buy offshore, through a wrapper, a trust or a company.... All pretty useful. In effect, there's almost never anything wrong with the product or the tax structure, just how they're used.
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Old 24.05.2011, 11:49
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Re: Bonds/Investment funds on your tax return

Ok so the govt bond was just an example to keep it simple. I don't think investment funds are so specialised or don't classify as a "retail investment product". People put their money into these all the time.

But back to the question. Is it really the case that you have to ask for a tax statement for each fund, which shows a notional interest amount paid out on a notional date, and you then pay tax on this?

If the answer is yes, then is there anything to stop you selling the fund just prior to this notional payment, and buying it again (apart from charges of course)? This would mean the tax statement from the fund shows no 'interest'.

The same goes for dividends. If you own some shares in a listed company, then you'd better sell the shares just prior to dividend payouts and buy them back just after. The capital gain made is not taxable, yet the dividend would be (if you had received it).

Am I missing something here? How come the Swiss financial world isn't full of products to do exactly that?
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Old 24.05.2011, 12:18
economisto
 
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Re: Bonds/Investment funds on your tax return

There are three classes of mutual funds in Swiss law - distribution, accumulation, and mixed.

For distribution funds (distribution of more than 70% of their income each year) the portion of income retained/reinvested in the fund will not be taxed that year but rather deferred and accumulated until such time as the private investor will choose to accept that income.

For accumulation funds (no distribution) all income is taxed. You'll receive an end of year report with the details - it's taxed at the unit holder level.

For mixed funds (distribution, but less than 70% of their income per year) income tax is levied both in the first example above and the second, but there is a sort of "double taxation" view so that tax isn't levied twice.

If you are looking to invest onshore you should look to establish a SICAF (not to be confused with SICAV) which is a Swiss investment company (a special class of company used for investments) and the tax treatment of this is similar to a normal company and is taxed in its own right and taxation of shareholders is only levied at the time of distribution.

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Ok so the govt bond was just an example to keep it simple. I don't think investment funds are so specialised or don't classify as a "retail investment product". People put their money into these all the time.

But back to the question. Is it really the case that you have to ask for a tax statement for each fund, which shows a notional interest amount paid out on a notional date, and you then pay tax on this?

If the answer is yes, then is there anything to stop you selling the fund just prior to this notional payment, and buying it again (apart from charges of course)? This would mean the tax statement from the fund shows no 'interest'.

The same goes for dividends. If you own some shares in a listed company, then you'd better sell the shares just prior to dividend payouts and buy them back just after. The capital gain made is not taxable, yet the dividend would be (if you had received it).

Am I missing something here? How come the Swiss financial world isn't full of products to do exactly that?
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Old 24.05.2011, 12:28
economisto
 
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Re: Bonds/Investment funds on your tax return

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If the answer is yes, then is there anything to stop you selling the fund just prior to this notional payment, and buying it again (apart from charges of course)? This would mean the tax statement from the fund shows no 'interest'.

The same goes for dividends. If you own some shares in a listed company, then you'd better sell the shares just prior to dividend payouts and buy them back just after. The capital gain made is not taxable, yet the dividend would be (if you had received it).
OK, if I understand you correctly (and I may not so please correct me if so) - you'd be missing out on (a) the value/capital spike from the reinvestment of the notional income payment or (b) the dividend from the share owned. In both instances you'd be missing out on the whole amount to save the percentage tax you'd owe.
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Old 24.05.2011, 13:59
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Re: Bonds/Investment funds on your tax return

Thanks for the info about the investment company. I'll look into that, although it sounds as though the sums involved would need to be quite substantial to make it worthwhile the extra costs?

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OK, if I understand you correctly (and I may not so please correct me if so) - you'd be missing out on (a) the value/capital spike from the reinvestment of the notional income payment or (b) the dividend from the share owned. In both instances you'd be missing out on the whole amount to save the percentage tax you'd owe.
You'd be right if the share price remained constant. However share prices always adjust (though not perfectly) to take account of the dividend - the share price the day after the dividend is paid, is lower by the amount of the dividend. If this was not the case, there would be some pretty cool arbitraging to be done... But I've never heard of people doing the sell/re-buy thing though here in CH, so either my understanding of the taxation of dividends is wrong, or there is another trick here I'm not aware of...??

I don't think the same applies for funds, as the notional interest payment is only notional (for tax declarations) - it doesn't lead to a fall in fund price. But by avoiding owning the fund on the date of the notional interest payment, you have nothing to declare. (my understanding is that the notional interest is only calculated/reported once a year, so you just avoid that day).
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