A capital gains tax poser

READER QUESTION: ARE DONATED UNIT TRUSTS TAXED?

Donation of a unit trust investment is recognised as a disposal of an asset and generally would trigger CGT.

AMoneyweb reader asks: I’m married out of community of property and would like to donate unit trust investments to my spouse. I’m aware donations tax isn’t applicable on donations between spouses. Will a donation to my spouse via transferring units in a unit trust investment trigger capital gains tax?

Trudy Luthuli, co-founder of Luthuli Capital, answers

According to Sars, being married and the type of marriage contract you choose has tax implications.

There are three types of marriages in SA: marriage in community of property, marriage out of community of property (with accrual), and marriage out of community of property (without accrual).

When married in community of property, there’s no separation of assets and liabilities between spouses, as they’re seen to have equal share of the joint estate.

While this is the default contract if a couple doesn’t have an ante-nuptial agreement, it’s not the most tax efficient.

In a marriage out of community of property (with/without accrual) each spouse is identified as an independent estate, where assets and liabilities aren’t merged into a single/joint estate. This generally has favourable tax implications.

Donations between spouses

A donation, as defined by Sars, is a “gratuitous disposal of a property in this case, without expecting something in return”. When an individual donates an asset to another, a 20% flat rate is levied on the value of the asset/property with a R100 000 annual exemption per financial year.

By transferring units in a unit trust investment, you’re donating an asset to your spouse. However, another exemption is donations between spouses. So you’re correct, the transfer of units in your unit trust investment to your spouse is exempt from donations tax.

Will transferring my investment trigger CGT?

Capital gains tax (CGT) was introduced in SA with effect from October 1, 2001 and applies to the disposal of an asset on/after that date. In this case, the donation of the unit trust investment is recognised as a disposal of an asset and generally would trigger CGT.

With unit trusts, you (the unit owner) are liable for CGT on disposal of units. In transfering to your spouse, you’ll be exempt from CGT and the rollover relief will be in effect.

This defers CGT to the ultimate disposal of the asset by your spouse. You may not trigger CGT now, but the liability of that tax is effectively placed in your spouse’s estate in a future year of assessment. Sars knows people may be tempted to transfer assets to a spouse with a lower marginal tax rate, to maximise tax efficiency.

As such, it’s allowed to disregard the transfer if the main purpose is to reduce, postpone or avoid paying tax. The asset will be reverted to the original individual.

Speak to a qualified, accredited wealth-manager to assist you with the transfer, ensuring there are no unintended consequences with Sars.