A fund gives dividend to the shareholders in every six months.
Last time after the dividend accounting period was over, the share price was $100 (after adjusting the dividend amount from the market price).
Now the share price is $112 at the end of current accounting period for the dividend. Hence a dividend of $12 will be paid out per share to all share holders. (112-100)
Now we have two investors Mr A and Mr B.
M
A is holding the shares for the entire current accounting period. Hence his cost price was 100 and now he is receiving an income of $12 per share. This entire amount is treated as income and once the ex date is over, the share price goes back to 100 to adjust the dividends ( assuming all other economic factors constant).
Now let us come to Mr B. He purchased the shares in between previous and current dividend date at $105 per share. He will also receive $12 per share.
But after ex date the share price will fall to 100 for him too. So can we call this entire $12 as income for Mr B ?
Answer is no because in his case, he earned $7 (112-105) as income and $5 as capital adjustment.
This $5 is called the income equalization amount which is treated as capital and not income for tax.
N:B When Mr B sells his share at $130 at a future date, for capital gain calculation, his cost price would come down to $(105-5)=100 as $5 is already received as capital repayment during last dividend payout.
( Hypothetical figures are taken for understanding the concepts only. In reality, we wouldn't have $12 dividend per share for a security trading at $112).
