Personal investing

Capital Gains Tax and how it affects unit trust investors

At Allan Gray, we focus on managing your investments. We acknowledge that there are important aspects of investing - such as tax on your investments - that are not directly related to portfolio management but which can and do affect your investment behaviour and therefore long-term returns. In this article, Rob Formby provides unit trust investors with a simple overview of Capital Gains Tax (CGT) and how this is calculated.

CGT was introduced into the Income Tax Act, 1962 ('the Act') in South Africa from 1 October 2001 and is applicable to capital gains made after that date. The Act sets out the basis on which you are taxed on capital gains arising from the disposal of an asset. Understanding the treatment of various types of capital gains that you may enjoy in your lifetime is important. In this article, we aim to equip you with some background to CGT and an understanding of the importance of the CGT tax certificates that we send you annually around this time of the year.

This summary contains insufficient detail to enable you to determine your CGT liability accurately in most practical situations. You should therefore not use this as a tax guide or for legal reference. If you require more information about any CGT aspect, you should contact your financial adviser, a qualified tax practitioner or your local South African Revenue Service (SARS) office.

Key facts about CGT for investors

Investors do not pay CGT when the portfolio manager trades shares
A key difference and benefit for investors in South African unit trusts is that you only incur CGT when you sell your units in a unit trust. The buying and selling of the underlying assets held by the portfolio manager are not seen as CGT events for either unit trust company or investor. Portfolio managers can therefore focus on their core business of managing the portfolio according to their mandate, without having to concern themselves with tax issues. The unit trust investor receives the advantage of asset allocations changing without CGT being triggered, which would be the case if the investments were held in a segregated share or property portfolio.

You decide when to become liable for CGT
A CGT event is triggered whenever an investor sells units. Therefore, you decide when to become liable for CGT, allowing you to defer tax and to plan your investments appropriately. In this sense, your role in managing your exposure to this tax is important.

YOU ARE NOT LIABLE TO PAY CGT SIMPLY BECAUSE YOUR INVESTMENTS GREW IN A PARTICULAR TAX YEAR

In other words, you are not liable to pay CGT simply because your investments grew in a particular tax year. You realise a capital gain or loss on unit trust investments only once you sell the units (known in the industry as a 'withdrawal' or 'repurchase'). This includes:

If you remain invested in the same unit trust, you could avoid paying CGT for as long as you remain in that fund. Investors should be careful, however, not to lose sight of their overall investment goals and objectives when considering 'deferring' CGT. CGT is merely one aspect to consider as part of your investment decisions.

Calculating your capital gains and losses

The Act provides that a taxable capital gain or loss must be included in the taxable income of a taxpayer for the year of assessment. The taxable capital gain is calculated in terms of the rules contained in the Eighth Schedule to the Act and will be determined by calculating the difference between the original cost ('base cost') and the market value of the units at the date of sale.

At the end of the tax year Allan Gray will send you a tax certificate (IT3c) reflecting any capital gains or losses you may have incurred during the tax year. You will have to declare any net gains or losses in your annual income tax return. Allan Gray is required to send copies of the tax information to SARS.

Determining the base cost of your units

The base cost of an asset is the cost of acquiring it. A capital gain or loss is determined by deducting the base cost from the market value of the units at date of sale.

Capital gains tax liability
In determining the base cost of your units, there are certain costs that may be added to the original cost. These amounts were incurred as expenditure directly related to the acquisition of the assets, one of which is initial financial adviser fees. If you make use of a financial adviser, Allan Gray automatically includes any initial fees you paid to them in the base cost of your investment. This reduces your CGT liability when you eventually sell the units. Ongoing financial adviser fees may not be added to the base cost of an investment.

A new WAUC is determined every time you buy units, taking into account the number of units you hold, the number of units you buy, the price paid for the units and the previous base cost. Allan Gray calculates and supplies investors with a WAUC.

CGT is applicable to offshore investments

Capital gains on offshore investments need to be calculated and declared in rands. To make this work, taxpayers are asked to translate each leg of the underlying transactions (each purchase and sale) into rands. SARS allows you to choose between using the average exchange rate over the year to do this, or to use the rate on the day of the purchase or sale. Fluctuations in the exchange rate can therefore also give rise to (or eliminate) capital gains or losses.

Planning is critical

In conclusion, it is important to plan your investment properly and understand the tax implications of your decisions (see Table 1). Make adequate provision for your tax liabilities and consider taking advantage of any concessions provided by SARS in your investment plan.

Although we have tried to set out the key things to consider in CGT, we are not tax professionals and we suggest you seek the help of an adviser if you need it. 

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