You will pay capital gains tax (CGT) on the gains you make when you sell your unit trusts. Many readers have questions about how the tax will be applied.
Question:
Gavin Copeland, of Pinelands, says that knowing that the first R10 000 of capital gain in any tax year will be free of CGT, he has two problems. If you have held a lump sum in a unit trust fund for three years and then you sell all, making a total profit of R26 000, and no other capital gains within those three years, does this mean you will not pay CGT, he asks.
Secondly, Copeland says currently the interest portion of the six-monthly dividends paid to unit holders are taxable as income in the hands of the unit holder. A number of people have an automatic re-investment of these dividends to purchase additional units. When you eventually sell all your units you will again have to pay CGT on the total value of those additional units as a part of your total return. Surely this is double taxation, he asks.
Answer:
The South African Revenue Service (SARS) says that, as is the case with exemption from tax on interest earnings, you forfeit the annual exclusion from CGT if you do not use it in any particular year. SARS says that assuming the transaction Copeland cites is on a capital account and not a revenue account, R16 000 of the R26 000 gain in the third year will be subject to CGT. Only 25 percent of this amount, or R4 000, will then be included in his taxable income.
As far as the question of double taxation is concerned, SARS says there is no double taxation since the units purchased with the re-invested amounts have their own base cost. See the example below.
Question:
GML Lowry, of Umhlanga Rocks, quotes a hypothetical example in order to clear up a problem that has been bothering him. He says suppose that on October 1, 2001 he holds 1 000 units in XYZ unit trust, with the interest and dividends being re-invested. His investment might increase as follows:
January 8, 2002 - 1 015 units
July 6, 2002 - 1 030 units
January 8, 2003 - 1 045 units
July 6, 2003 - 1 060 units
He then sells the 1 060 units.
Lowry wants to know if he is correct in assuming that he will have to pay CGT on 1 000 units from October 1, 2001, 15 units from January 8, 2002, 15 units from July 6, 2002, and so on.
Answer:
SARS says this is correct. Assume that on the valuation date (October 1, 2001) the value of the 1 000 units is R20 000, the cost of the additional 60 units is R150, and that the proceeds on disposal are R25 150. This would result in a capital gain of R5 000.
Question:
David Lawson has a number of questions. He says he holds unit trusts as well as shares on the JSE Securities Exchange and wants to know if the value of these for the purposes of CGT will be calculated as at close of business on September 30 or October 1.
He says he holds unit trusts through a management company, which charges him a monthly fee. He wants to know if this fee is deductible from any capital gains he may make.
Thirdly, Lawson says some of his units are held in income and gilt units. These pay interest (on which income tax is paid), which is re-invested.
Lawson wants to know if on selling these units he will have to pay CGT on the difference between the original capital amount and the redeemed amount bearing in mind that the increased amount will include the re-invested interest amount on which income tax has already been paid.
He also asks if unit trust companies will be paying CGT on behalf of the taxpayer and if there is any rebate before capital gains tax kicks in, as is the case on selling property.
Answer:
SARS says the Commissioner of Inland Revenue will publish the market values to be used as the base cost at October 1 for securities on the JSE and for domestic unit trusts. These market values will be based on an average of the values for the five trading days before October 1.
In answer to Lawson's question about the monthly fee, SARS says the fee cannot be deducted as it is a current expense that does not enhance the value of the assets concerned. SARS also says income re-invested in the unit trusts will be utilised to purchase additional units, which will have their own base costs.
As an example, assume that the reader holds 10 000 units with a total base cost of R50 000 and interest of R5 000 is re-invested to purchase an additional 800 units. The total base cost will increase to R55 000 and, if the 10 800 units are all sold for R75 000, the capital gain will be R20 000, not R25 000 as the reader fears.
SARS says unit trust companies will not be liable for CGT on their disposals but unit holders will be liable for CGT on the disposal of their units. Reporting requirements have been prescribed for unit trust management companies and the information provided will be of great assistance to unit holders in determining their capital gains or losses.
Lastly, on the rebate question, SARS says an individual's aggregate capital gain or loss for a year is reduced by an annual exclusion of R10 000. This exclusion increases to R50 000 in the year the individual dies.
In addition, there is a primary residence exclusion of up to R1 million as well as a small business retirement exclusion of up to R500 000.
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 Service in this column. Send your questions to Personal Finance, PO Box 56, Cape Town, 8000, or fax (021) 488 4119, or send an e-mail