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Can I switch unit trusts without incurring CGT?

It is important to differentiate between a compulsory unit trust investment and a discretionary unit trust investment.

I understand that I can switch from an equity-based unit trust to a money market unit trust and not incur CGT provided that they’re in the same family of unit trusts. Is this correct? If so, how does this work in practice?

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At the outset, it is important to differentiate between a compulsory unit trust investment and a discretionary unit trust investment. Compulsory unit trust investments are in essence retirement funds, such as retirement annuities, pension or provident funds, preservation funds, or living annuities, which are invested on a unit trust platform. These funds are legislated by the Pension Funds Act and, in terms of Regulation 28 of the act, are restricted in the amount of equity exposure borne within a fund. These funds offer very attractive tax benefits to investors and make excellent long-term investment vehicles for several good reasons.

If you are invested in a compulsory unit trust fund, there will be no Capital Gains Tax implications if you switch funds within the investment, nor if you make any withdrawals from your investment. Further, no CGT will be charged on any gains that you make within these funds.

On the other hand, if you are invested in a discretionary unit trust portfolio, you will be free to select any fund at your disposal and not subject to regulations in respect of your risk exposure. Having said that, discretionary investments do not offer the same tax benefits as compulsory investments and this applies to CGT as well.

When it comes to discretionary investing, remember that you have an annual CGT exclusion of R40 000 thereafter any gain is included at a rate of 40% in your taxable income for the year.

If you are invested in a discretionary unit trust portfolio and want to switch from an equity-based fund to a money-market fund, this action will have capital gains tax implications for any gains made after your annual exclusion – bearing in mind that CGT will be triggered even if you make use of the same service provider and fund manager. The reason that CGT will be triggered is that the switch is effectively a sale of the unit and repurchase of new units, and any sale of units triggers a CGT event.

However, a single unit trust fund redeeming shares within a fund or a fund-of-funds does not trigger any CGT, and this allows fund managers to make changes without any tax implication for their investors. In such instances, CGT is essentially deferred until an investor decides to sell their units.

Before switching your funds, it is advisable to speak to your financial advisor as there may be ways to reduce your overall taxable income and to limit your CGT liabilities.

  

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