Managing your investments is an important process of wealth generation and preservation. Part of the management process will involve weighing up the pros and cons relating to taxation of your investment choices. Unit trusts and shares are popular investment vehicles that offer a variety of choice. Yet, the capital gains tax (CGT) implications of these investments could, and should, influence your investment choices.


According to Floris Slabbert, Country Manager at Ecsponent Financial Services, understanding every aspect of investments and the tax burdens implicit therein is vital to making responsible decisions. “It is imperative that investors understand and manage the tax implications of their investments,” he said.


Slabbert says that investors should understand what capital gains are, how they are calculated and when taxation becomes applicable. “The foundation of capital gains tax on the disposal of assets is in legislation,” says Slabbert. Capital gains tax, as described in the Income Tax Act of 1962, applies to capital gains realised after October 1, 2001.


“A starting point is understanding that capital gains are taxed differently to income. Capital growth is the change in an asset’s value over a defined period of time. This means that as the value of an asset grows, so does the potential capital gain of the share or unit trust,” explains Slabbert. To calculate the capital gain, subtract the cost of the investment, referred to as base value, from the current market value. If the investment was purchased before October 1, 2001, the value at that date is used as the base cost.


Capital gains tax is applicable when an investor disposes of an asset. In other words, just because your asset, be that a share portfolio or unit trust, grew in capital value over a defined period of time, it does not mean you have to pay capital gains tax. “You only become liable for CGT when you sell an asset. What this means is that you can defer or delay the tax burden on your asset as you plan and manage your investments. This is where the qualified opinion of an expert financial advisor becomes crucial,” says Slabbert.


It is important to understand at this point, what constitutes the selling of an asset, or simply speaking, what triggers a CGT event. If you sell a portion or all of your investment in shares or take out a once-off or regular withdrawal from a unit trust, you become liable for CGT.


Triggering capital gains tax

Among the actions that will trigger CGT, are:

    • Switching between unit trust funds
    • Once-off or regular withdrawals from your fund
    • Immigration or death of an investor (unless you have made provision for the units to be transferred to a living spouse)
    • Disposal of all or a portion of shares
    • Divorce in the case of a marriage in community of property
    • Transfer to another investor that is not your spouse.


Among the actions that do not result in the triggering of CGT, are:

    • Switching between different classes of the same fund
    • Transferring units of the same fund and class to another investment platform
    • CGT does not apply to retirement annuities, preservation funds or an investment-linked living annuity
    • Transferring investments to a living spouse – the CGT will roll over to the spouse at the same base cost.


Capital gains tax exemptions

Slabbert points out that there are certain exemptions and exceptions around a CGT event. Individuals and special trusts* have a CGT exemption of R40,000 per year. In other words, no CGT will apply to the first R40 000 capital gains a taxpayer receives in one year. In the year of death, this amount increases to R300 000. Additionally, gains of less than R2 million on the sale of your primary home are exempt from CGT. Slabbert advises investors to speak to a professional to determine what portion of capital gains to add to their gross income. That amount will be taxed at the taxpayer’s marginal rate.


“When you sell units or shares, CGT is a consideration. This doesn’t matter whether you plan to reinvest the profit or not. Taking a holistic view of tax and investments will help your wealth generation activities significantly” says Slabbert.


Making provision for tax liabilities, and being agile enough to take advantage of any concessions is important to realising the full potential of investments. It is for this reason that Slabbert suggests the help of a financial advisor. Specifically one well-versed in the tax landscape of South Africa. “Being tax-smart, particularly around CGT on unit trusts and shares, is one sure way to realise more from your investments in the long run.”


* Special trusts are established for the benefit of ill or disabled persons. They include testamentary trusts established for the benefit of minor children.