“I have been advised to switch my unit trust portfolio to another fund manager. I am invested through an investment platform, so will I still have to pay capital gains tax [CGT]?” asks Carol.
The simple answer is yes. According to Rob Formby of Allan Gray, CGT is essentially a tax on the capital gains you make when you dispose of assets, such as units in a unit trust, and therefore CGT also applies when you switch between different unit trusts, even if you are invested through an asset manager’s investment platform or LISP.
What triggers a CGT event?
Formby says CGT is also triggered if you transfer all or part of your investment to someone else. If you are married in community of property and you decide to divorce, a CGT event will be triggered because the assets you and your spouse own jointly will be divided and the proceeds will be split between the two of you.
If you emigrate or become sequestrated, CGT will apply, as it will on your death, unless you’ve made provision for your units to be transferred to your surviving spouse or you transfer them to a registered public benefit organisation.
CGT is not paid in the fund
What is important to note, however, is that CGT is not incurred in the fund. As Formby explains, the gains that your portfolio manager makes through buying and selling shares within your unit trust fund are not taxed.
This is because you, the investor, incur CGT when you ultimately sell your units, whether you do so regularly or on a once-off basis. If CGT applied both when the manager sold shares and when you sold your units, it would amount to double taxation.
This means that if you are invested in a fund of fund unit trust and they switch to another underlying unit trust, you would not be liable for CGT.
Retirement assets are exempt
If you’re invested in a retirement annuity (RA), you don’t pay CGT, even when you finally cash out of it. The same is true for your living annuity, where you do not pay CGT on growth of the underlying investments.
According to Formby, when it comes to endowments, policyholders are not required to account for their investment income and capital growth in their tax return. As a policyholder you are not taxed directly; your fund, which pools your contributions with those of other policyholders, will pay the tax on your behalf and then reclaim it from you, as is normally set out in your policy document.
CGT on offshore investments
CGT is also applicable to your offshore investments. Any gain needs to be calculated in rands. Formby says to make this work, taxpayers are asked to translate each leg of the underlying transactions (that is each purchase and sale) into rands. Sars allows you to choose between using the average exchange rate over the year or the rate on the date of the purchase or sale. Fluctuations in the exchange rate can therefore also give rise to, or eliminate, capital gains or losses.
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