Johannesburg - The way you manage capital gains tax (CGT) in your investment portfolio will have a direct impact on long-term returns.
CGT is a tax on the capital gains you make when you sell assets, such as units in a unit trust. The gains a portfolio manager makes through buying and selling shares within a unit trust fund aren't taxed.
Because CGT only applies when you sell units, it allows you to defer CGT. Unit trust managers usually send a tax certificate (IT3c) at the end of each tax year, reflecting any capital gains or losses incurred during the year to be declared in the taxpayer's annual income tax return.
CGT also applies when an investor switches between different unit trusts. It is also triggered if you transfer all or part of an investment to someone else. Couples married in community who file for divorce will trigger a CGT event, because the assets will be divided and the proceeds split between the parties.
If you emigrate or become sequestrated, CGT will also apply as at death, unless you have made provision for units to be transferred to a surviving spouse or a registered public benefit organisation.
You won't have to pay CGT as long as you remain invested in the same unit trust. However, said Rob Formby, head of retail operations at Allan Gray, you shouldn't lose sight of your overall objectives and goals when thinking about deferring CGT, as this is merely one of several factors to consider when making investment decisions.
A distinction should also be made between a capital gain and a trading gain. If you buy and sell frequently, the South African Revenue Service may classify investments as trading stock. Investment gains would then be treated as trading gains and fall under income tax, not CGT.
Formby said it's important to plan your investment properly and understand the tax implications of your decisions. "Make adequate provision for your tax liabilities and structure your plan so that you can take advantage of any tax concessions," he said.