Question One:
How will unit trusts be valued on October 1 this year for capital gains tax? Will it be at the buying price or the selling price, Pat Harrison asks. Harrison says it seems it should be at the higher price, as that is what would have been paid had they been bought on that day.
Answer:
The South African Revenue Service (SARS) says the values of units in domestic unit trusts on October 1 will be published by the Commissioner in the Government Gazette, as well as on SARS Online ( sars.gov.za).
These values will be based on the average of the closing prices at which units could be sold to the management companies (usually the "sell" price quoted in most newspapers) for the last five trading days before the valuation date. This valuation excludes initial costs and is in line with the general exclusion of ancillary costs of acquisition in arriving at the market values used for capital gains purposes.
Including these costs for the values on October 1 would effectively permit the full deduction of a notional cost, part of which would relate to the period the asset was held before October 1.
SARS says if a taxpayer feels this valuation is unfair in his or her circumstances, it may be possible to use time-apportionment, which takes all permissible historic costs of acquisition into account, but allocates them to ownership before and after October 1.
However, it should be noted that time-apportionment and the weighted average cost method discussed here are mutually exclusive.
Question Two:
Harrison also asks how the loss or gain would be calculated if an investor adds to an existing unit trust fund each month for a couple of years after October 1, and then sells all the units.
Harrison says "the mind boggles at the complicated book-keeping necessary for working out the gain/loss on unit trusts bought monthly over 24 months, each at a different price, only to find that it is minimal! Certainly well below the R10 000 allowed. An exercise not for the fainthearted or unsophisticated!"
Answer:
SARS says two features of the legislation reduce the record-keeping a monthly investor in a unit trust would have to do.
* The availability of the weighted- average cost method as one of the three authorised methods for determining the base cost of identical assets. SARS says, in essence, this method involves keeping running totals of the number of units bought and sold in a particular fund.
For example, units in a unit trust are purchased on the dates indicated.
Date
No. units
Cost/unit
Cost
1 Oct 200110015.001 500
1 Nov 20015016.00800
1 Dec 2001 15017.002 550
1 Jan 200210013.501 350
Balance4006 200
On February 28, 2002, 125 units are sold for R2 125.00. The weighted-average unit cost is R6 200 /400 = R15.50 and the base cost of 125 units is therefore 125 x R15.50 = R1 937.50. The capital gain is R2 125.00 - R1 937.50 = R187.50.
Date
No. units
Cost/unit
Cost
Balance40015.506 200.00
28 February-12515.50-1 937.50
Balance2754 262.50
If an additional 100 units are bought for R18.00 each on April 1, 2002, the new weighted-average cost may be calculated as follows:
Date
No. units
Cost/unit
Cost
Balance275 4 262.50
April 1, 2002 100 18.00 1 800.00
Balance375 6 062.50
The weighted-average unit cost is R6 062.50/375 or R16.67.
* Unit trust management company reporting. In order to simplify matters still further, management companies have been given the responsibility of providing returns of the sales of units by investors.
These returns will be similar to the annual returns of interest earned that are already prepared by the management companies and will disclose:
* The number of units disposed of by the unit-holder;
* The cost of those units determined on the weighted-average basis;
* The proceeds on disposal of those units; and
* The gain derived from, or loss incurred in respect of, the disposal of those units.
SARS says unit-holders who do not wish to use the weighted-average cost method to determine capital gains on the disposal of their units are not bound by this return. However, they will have to keep the records necessary to support the alternative they select.
If there are capital gains tax issues you are unsure of, send your questions to us and we will publish the replies from the South African Revenue Services. Send your questions to Personal Finance, PO Box 56, Cape Town, 8000 or fax (021) 488 4119 or e-mail [email protected]