Investors in unit trusts which have merged, or are about to merge, with other unit trusts must declare any losses they have made on their investments in the tax year of the merger.
Investors who have made a gain do not, however, have to pay capital gains tax (CGT) immediately. They will only be taxed on the total gains when they sell their units in the amalgamated fund.
This means that if you own any African Harvest, BoE, Nedcor Bank, NIB Multi-Manager and FTNIB unit trusts, which were merged when Nedcor rationalised the 58 funds in its stable down to 24 funds on November 1 this year, you do not have to report any gains when you complete your tax returns next year. But Nedcor investors who have made losses should declare these for tax purposes.
And if you are an investor in any Liberty or Standard Bank unit trusts, which may amalgamate on March 1, 2004 if unit-holders give the go-ahead for the mergers, you will be able to claim any losses in the 2004/05 tax year.
When unit trust funds merge, units in the fund being absorbed are sold, and units in the new fund are bought. The sale of units is a CGT "event".
But Di Turpin, the executive vice-chairperson of the Association of Collective Investments (ACI), says if you make a capital gain in a fund that is being merged, the tax on that gain is automatically deferred until you sell your holding in the amalgamated fund.
For CGT purposes, the base cost of the old units becomes the base cost of the new units. When a fund merges, the CGT event is known as a rollover.
However, losses cannot be rolled over and must be declared in the tax year they are realised. You cannot claim a capital loss against your income for tax purposes; you can only use it to offset any gains you make.
If you do not make any gains in the tax year in which you make the loss, you can, to the extent that it exceeds the annual CGT exclusion of R10 000, carry it over until the tax year in which you make a gain.
If you are invested in any of the unit trust funds that are being merged, your unit trust management company will send you an IT3C statement after the tax year ends in February next year. This statement will reflect any gains or losses when the fund in which you were invested was merged with another.
However, if at the time of the merger the market value of the fund was greater than your base cost, any gains made will be regarded as being rolled over and you will only have to pay CGT on them when you eventually sell the new units allocated.
Turpin says that since the introduction of CGT in October 1, 2001, all unit trust management companies have adopted the "weighted average base cost" method of valuing unit trusts.
This means that if you had units in a fund on October 1, 2001, the value of those units on that day, as published in the Government Gazette, will be used as the base cost when any gains or losses are calculated for the purposes of sending you an IT3C.
For any subsequent purchase of units, the average base cost will be recalculated, she says.
However, you have the right to use one of two other methods of calculating the base cost of your units. You can specify which units you are selling (in terms of the date you bought them and the price you paid for them), or you can use the first-in-first-out (FIFO) method, which assumes you sell the units in the order that you bought them.
The ACI, Turpin says, recommends that investors consult a tax expert before deciding to use an alternative method, as it requires accurate records. Once investors have chosen a method, this has to be used for all future transactions involving that category of investment.
There are four such categories: unit trusts, shares, gold and platinum coins, and interest-bearing debt.
For example, if you choose the FIFO method for one of your unit trusts, you must use it for all your unit trusts. And if you choose the weighted average for one of your shares, you must use it for all your shares.