“A good tax system is a simple one – right? Well all I can say is that someone forgot to tell the Government which has created a nightmare of complexity for FIF taxpayers. The Government was no doubt aided and abetted by its advisors who should surely have known better”.

I noted that the new regime would result in a huge amount of unproductive time and cost and I provided a horrendous list of things investors would need to know and things they would have to do, to meet their tax obligations. At Sharesight we came to the rescue of our customers caught under the FIF rules by giving them a FIF report that provided the information they needed automatically.

I concluded my June 2008 blog post by asking:

“So what’s the answer? We can but hope that if there is a change of Government, this piece of lunatic legislation will be repealed. But don’t hold your breath!

Now two years later we have had a change of Government and Terry Hall advises that ‘officials are studying ways to remove it’. See Dompost June 7 2010 NZ Grass may be looking green for tax weary Brits.

My mind boggles at the phrase ‘studying ways to remove it’ – surely all they have to do is scrap it!

Then we can stop holding our breath.

A copy of a disclosure statement for Tony Ryburn and Sharesight is available here. This is provided in order to comply with our obligations (if any) under the relevant legislation and is not a representation that either Tony or Sharesight is an investment adviser.
Nothing contained in this blog is intended to be investment advice and neither the writers nor Sharesight accept any liability for reliance on information or opinions contained in this blog.

Last year I was a fourth year Software Engineering student studying a Bachelor of Information Technology at Victoria University of Wellington. My commercial software development experience came from being the Summer of Code intern at Xero during the summer of 2008/2009. The experiences learnt there and in previous jobs helped in quickly becoming a productive member of the Sharesight team. Most of my development experience had been more desktop oriented software with Java and C#/.NET, so being dropped into the world of Ruby and Ruby on Rails was quite a bit of an eye opener and I had to quickly get an understanding of how to use it appropriately.

The Wellington Summer of Code is an internship program started by John Clegg to match ICT students around Wellington with ICT companies around Wellington. This year was the fourth year it has been run and it has grown to well over a hundred students vying for positions at over twenty companies from small startups to large corporate and government organisations. Each internship is around twelve weeks of full time work covering various aspects of ICT.

At Sharesight, I worked on the development of a few new features that will make life easier and less stressful for the Sharesight customers. Here’s an overview of what I worked on and some of the experiences I had while in the middle of it all.

Contract note email importer

The Contract Note Email Importer is a new feature of Sharesight that will eliminate the need to record new shares as you buy and sell. This feature works by taking the PDF contract note emails that you receive from your broker once a trade is completed, and automatically extracts the relevant trade data and records it into your Sharesight portfolio. Development of this feature was really interesting as we had to work with processes that already existed, while keeping any extra steps as close to zero as possible. The process of this development also exposed me to a somewhat different way of doing things than I had experienced in the past.

Some of the interesting problems encountered included finding and creating a way to give as much feedback as possible to the customer should something not work during the processing of the contract note. For example, if the processing failed due to the contract note selling more shares then we knew were owned, then we could tell the customer exactly why the processing failed. On the other end, the processing may have failed for a reason that could not be easily defined so we would have to send a much broader email with several things to check. We also had to build it in a way that new messages could easily and quickly be added in the future.

The contract note email import function is currently undergoing the final stage of user testing and is available to members of the Sharesight Beta Group.

Trades report and trade export function

One of the things that we have had many customer requests for at Sharesight is the ability to export all the trades that a customer has entered. The second project I worked on helps solve this issue, giving each customer the ability to export their data from Sharesight should they feel they need to. This was an interesting project that required me to look at the problem from the customer’s perspective. This meant going through each step while thinking of the ways a customer would look at the information, links, buttons, etc. and build the report in a way that would be clear, easy and quick to use.

During the development of the trades report, we researched the import/export formats of other related systems to ensure that the format we used in the trades report was broadly compatible with other similar systems.

This morning we made the Trades report available to all Sharesight customers.

Conclusion

The internship has been an interesting and good learning experience. I have learnt a lot about the development of good, solid web based software solutions. You may even see another blog post from me in the future, as I have been taken on as a full time developer for Sharesight.

The Excel sheets contain formulas to calculate totals where appropriate so this will make it really easy to add new rows into the spreadsheets if you need to.

The Excel export files are compatible with the following versions of Microsoft Excel:

• Excel XP, 2003 and 2007 for Windows
• Excel 2004 or 2008 for Mac OS X

Thanks to our beta group customers for the testing and feedback.

We have started on our list of improvements by fixing problems that many of you reported with the ‘remember me’ function. ‘Remember me’ will now work across multiple computers and we have increased the time that ‘remember me’ stays active so that it will still work even if you haven’t accessed Sharesight for a while.

Here are some tips on how to use the ‘remember me’ function:

1. If you don’t want to have to type your email and password each time you access Sharesight, click the ’remember me’ tick-box on the login page. Please note that this will allow anyone who has access to your computer to view your portfolio without a password, so if other people have access to your computer you might not want to use the ‘remember me’ function.

2. When you have finished using Sharesight simply close your browser. Do not click the logout link – see below.

3. If you don’t want to use the ‘remember me’ function anymore, access your Sharesight account and click the ‘logout’ link in the top right corner of the screen. This will clear your ‘remember me’ status on all computers that you have used to access Sharesight.

The Xero Synchronisation feature allows you to connect your portfolio to your Xero account. This allows you to send details of share purchases, sales, and dividends to Xero as draft invoices, which can then approved for inclusion in your financial accounts and used to reconcile against your bank account.

If you have a Xero account, Xero synchronisation can be set up by clicking settings, then ‘Xero Synchronisation’ for the portfolio that you wish to connect. Note that you must first generate a Sharesight Network key from within Xero. Full instructions can be found in the Sharesight help documentation here.

Below is a short video we prepared for Xero customers:

The event will feature the following guest speakers:

Morning Session:

• The Hon Bill English on Creating an Ownership Society. Bill is the Deputy Prime Minister, Minister of Finance and Minister of Infrastructure.
• Tim Brown on Preserving Shareholder Value in Difficult Times. Tim specialises in financial structuring at Infratil. He is also a director of Wellington Airport and NZ Bus.

Afternoon Session:

• Oliver Saint on Using Z Scores to Rate Companies. Oliver is a Chartered Accountant and a former merchant and investment banker. He now works from home as an equities fund manager.
• Rodney Dickens on Recessions and Investing in the Share Market. Rodney is Managing Director and Chief Research Officer of Strategic Risk Analysis Limited and has worked in the share broking industry for 12 years as an economist, strategist and head of research.

For members of the public the cost is $20 each for the morning and afternoon sessions or $50 for the full day including lunch. For Further information please visit The NZSA Website

If you are a Sharesight subscriber we have some limited free spaces available at the morning and afternoon sessions, please email contact@sharesight.co.nz before 4pm Wednesday 22 July if you are interested.

One of the reasons they fail is that providing you with the true, annualised return on your shares is trickier than it sounds. For a start you need to have a large amount of data at your fingertips and you need to be able to account for corporate actions like dividends, share splits, amalgamations and bonus issues because these will make nonsense of return calculations if you don’t.

To further complicate matters, there are two common arithmetically correct ways to calculate returns and in some circumstances they can give radically different answers. The two methods are the compounding method and the simple or non-compounding method.

The easiest way to appreciate the difference between the two methods is to consider a deposit account at the bank. If the bank quotes you a 7% interest rate this is a compounding rate. This means that if you do not withdraw your interest it will remain in your account and you will receive interest on that interest. Under the simple or non-compounding method, interest is calculated only on the original amount invested.

It is clear from the table below that $1000 invested for 10 years at 10% using the simple method does not equal 10% using the compound method. The simple method results in the return of your initial investment of $1000 plus a further $1000 of interest at the end of 10 years, whereas the compounding method results in the return your original investment of $1000 plus $1593.74 of interest. In fact an investment of $1000 that results in a return of that investment plus a further $1000 of interest over 10 years, equates to a compound return of approximately 7%.

To compare apples with apples a compound return calculation must be applied to your share portfolio if you want to compare its returns with a bank deposit. In the example above the correct return to compare to a bank deposit is 7% compound not 10% simple.

So what does Sharesight do?
Until now Sharesight has used a simple return calculation. This method is widely used to calculate share returns. Although it is arithmetically correct, it produces figures that overstate share returns in comparison to a compound return on a bank deposit.

This is why we have introduced a compound return calculation that you can select and apply to all tables in Sharesight that display return information. We use a daily compounding formula as this is standard practice among banks. Although simple interest will remain as the default setting you can choose to switch to compounding returns on a per portfolio basis by editing the portfolio settings (found under the settings link at the top right of the screen). There is also a link to change the percentage return method at the bottom of each page for which compounding return figures are available.

So which is correct and what should you do?
Both methods are arithmetically correct. We at Sharesight do not wish to get embroiled in a debate concerning the merits of one method over the other. You are free to choose which ever method you prefer.

Some more technical information about the formulas that Sharesight uses to calculate returns can be found here.

We also answer some common questions about compounding interest (and a variety of other questions) in the frequently asked questions section of the help documentation, which can be found here.

The first part of the report shows which of your shares are caught by the new rules after allowing for various exemptions. For most investors, there is also a further threshold exemption if the cost price of your overseas investments is less than $50,000. The report provides the cost price of all of your shares that are subject to FIF tax, so you can see whether you exceed the threshold amount.

If you are caught by the new rules, the report will calculate your FIF tax liability under both the Fair Dividend Rate (FDR) method and the Comparative Value (CV) method so that you can select the one that minimises your tax bill.

The report provides a simple summary page as well as detailed report pages, and worksheets detailing all aspects of the calculations. As with the other Sharesight reports, the FIF report has a number of sophisticated ‘behind the scenes’ features such as automatically adjusting for share splits, consolidations and bonus issues.

The FIF report can be run on an existing portfolio at the click of a button. New users can easily set up a portfolio in a few minutes because dividends, splits and consolidations, share prices and exchange rates are all provided automatically.

The first part of the report, showing whether you are caught by the new rules, is now available to all Sharesight subscribers (including free trial users). The remainder of the report is available to subscribers on the Expert plan.

If you would like to see the FIF report in more detail, please take a look at the short 5 minute demo video below.

For those FIF taxpayers who are not Sharesight customers (see below) the new regime is going to result in a huge amount of unproductive time and cost. When this is added to the cost of setting up and administering the new FIF regime, the costs are surely going to be outweighed by the tax revenue benefit many times over.

The range of information required by FIF investors to complete their tax return is mind-boggling. Amongst other things they need to:

• Identify their FIF investments
• Determine whether a threshold exemption applies by establishing what was paid for FIFs on day one (including brokerage) using a FIFO calculation to account for subsequent buys and sells
• Identify any individual investments that may be exempt based on a complex and difficult-to-determine set of criteria
• Establish market value of portfolio value at the beginning of the year
• Determine the appropriate tax calculation method(s)
• Identify acquisitions and disposals during the year
• Make any required adjustments for quick sales, using at least one of two possible methods
• Adjust for and capital reorganisations that may have occurred
• Identify all gross dividends received
• Identify the dates of all transactions
• Identify appropriate exchange rates and do the conversions
• Obtain the market value at the end of the year if the CV method is the most appropriate

So what’s the answer? We can but hope that if there is a change of Government, this piece of lunatic legislation will be repealed. But don’t hold your breath!

In the meantime there is great news for FIF investors with non-exempt Australian shares. At the end of next week we will be providing an FIF report to customers on the Expert plan which will provide the data they need to meet their tax obligations automatically. This will save a huge amount of time and angst not to mention accounting fees -assuming they can find an accountant prepared to do the work at any price.

Below is a sneak peak at what the new report will look like, we will be publishing a more detailed tour shortly.

       

Click the images to enlarge them

The sold shares report shows capital, dividend, and currency gains associated with shares that have been sold and are therefore not reported under your current holdings. As with the main portfolio page, the return figures in the report may be displayed in dollars or as annualised percentages.

Other recent changes include the addition of a quantity column on the main portfolio page to show the total quantity of shares owned for each holding (by popular demand!). Thanks to everyone who has provided feedback, and please keep it coming!