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Collective Investments
Sunday, February 1, 2004
Tax option

Investors in unit trusts which are set to merge over the next few months should, in the normal course of events, not incur any Capital Gains Tax liability through the funds’ amalgamation, says Di Turpin executive vice-chairperson of the Association of Collective Investments.

“The CGT treatment of unit trust mergers depends on whether there is a capital gain on the date of amalgamation. Any loss has to be realised and reported in the tax year in which it takes place.
“If there is a gain, the amalgamation may be treated as a rollover event. It is assumed that all the units in the amalgamating fund are disposed of at their total base cost and units in the new fund are acquired at the same total cost. CGT will only be payable once the new units are sold. The taxpayer may elect to realise the gain in the year of amalgamation.”
Since the introduction of CGT in October 2001 all unit trust management companies have adopted the “weighted average base cost” method of valuation of unit trusts. If an investor had units in a fund on 1st October 2001 the Gazetted value on that day would have been allocated as the base cost of those units. For any subsequent purchase of units, the average base cost would have been recalculated automatically.
The management company records the average base cost of each unit in an investor’s account. In the event of an amalgamation the management company would first compare the market value of the units to the investor’s unique base cost to establish whether there was a capital loss. If this were the case, it would treat the amalgamation as a normal disposal and report it as a sale. The capital loss is thus realised.
Should the market value of the investor’s units be greater than the base cost at the time of amalgamation, the management company would record the transaction as a sale at the base cost, thus no capital gain. The total base cost is then carried forward to the account in the new fund and is divided by the total number of units allocated to arrive at a new average base cost.
The transactions would be reported to SARS on this basis and an IT3(c) certificate would be sent to investors around April. Taxpayers have the right to use any other two methods of calculating the base cost of units - specific identification or first in first out. The ACI says investors should consult a tax expert before deciding to use an alternative method as it requires accurate records. Once investors have chosen a different method this has to be used for all future transactions. Similarly, it is advisable to consult a tax expert before deciding to realise a capital gain on the amalgamation of your unit trust fund.

Copyright © Insurance Times and Investments® Vol:17.1 1st February, 2004
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