[READER QUESTION] 'Why does a client pay capital gains tax (CGT) when an asset manager rebalances a portfolio?' Gareth Collier from crueinvest responds. Moneyweb assetmanagement
When an asset manager does portfolio rebalancing – for instance, sells high-risk shares to purchase low-risk shares within the portfolio – the client has to pay capital gains tax if there was a gain, even though the funds were never drawn out. This seems unfair as the client did not withdraw the funds; they were used to purchase other shares so, in reality, it was not an income earned in the period.
This reallocation of monies results in the sale of units within a particular underlying fund for the purchase of units within another fund to bring the investment strategy back in line with its mandate. Think of interest received on a fixed deposit – this is included in your annual taxable income even if the monies have not yet been received or become accessible.
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