IFM13328 - Offshore Funds: participants in offshore funds: participants within the charge to income tax: reporting funds: reported income: equalisation

Regulation 94A of SI 2009/3001

Where a reporting fund operates full equalisation details of equalisation adjustments must be reported to investors in accordance with regulation 92(1)(f). Where an investor purchases an initial interest in a reporting fund which operates full equalisation, the investor may deduct from their reportable income an amount equal to the equalisation amount. The equalisation amount is the part of the acquisition price which is attributed to income that has accrued to the fund in the period of account up to the time of the acquisition and which is taken into account in determining the acquisition price. Actual distributions and any excess amounts may be reduced in accordance with either option 1 or option 2.

Option 1:

• any actual distributions to the participant in respect of the reporting period are reduced by the equalisation amount; and

• the amount of any excess treated as additional distributions made to the participant is reduced by the amount, if any, by which the equalisation amount exceeds the amount of any actual distributions to the participant in respect of the reporting period.

Option 2:

• any excess treated as additional distributions to the participant in respect of the reporting period is reduced by the equalisation amount; and

• the amount of any actual distributions to the participant is reduced by the amount, if any, by which the equalisation amount exceeds the excess.

Under both options the amount of any excess treated as additional distributions shall not be reduced below nil.

Example

Sue purchases 10 units on 31 December 2016 in Reporting Fund A for £106 per unit. £6 of the acquisition cost is deemed as the income accrued in the fund in the period of account up to the date of acquisition (10 units x £6 = £60). On 31 March 2017 Fund A distributes £5 per unit to investors and Sue receives a total distribution of £50. Using option 1 Sue can reduce the amount of actual distributions by an equalisation amount of £50 (10 units x £5). On the same day, the fund retained an excess of £3 per unit which is treated as additional income (see regulation 94 (2)). Sue is deemed to have received £30 in additional income but can reduce the amount of the excess by £10 (10 units x £1) which is the remainder of the equalisation amount. Sue’s total reportable income for the period is therefore £20 (distributions £50 + excess £30 less equalisation £60).