Dear reader,

In order to answer your question, we will need to make some assumptions about your portfolio.

Since you are referring to an asset manager or portfolio manager performing a rebalancing of your portfolio, we would assume that you have a focused investment strategy whereby the manager allocates your funds within of a specific mandate.

This would require them to complete a portfolio rebalancing if prevailing market conditions cause current holdings to drift too far outside of strategic asset class allocations.

This reallocation of funds results in the sale of units of a particular underlying fund for the purchase of units of another fund in order to realign the investment strategy with its mandate.

This sale and the reallocation of invested monies will trigger a capital gain event if the units sold have grown relative to their cost base. Since the investor appears to be leaving that particular fund, partially or totally, due to the redemption of the units, the gain must be recorded and included in the investor’s taxable income for that specific tax year. Even if an investor does not take this redemption in cash, income or otherwise, Sars considers this a taxable event.

Keep in mind that income does not have to be physically received for it to be included on your tax return.

Think of interest received on a fixed deposit – it is included in your annual taxable income even if the funds have not yet been received or have not become accessible.

While rebalancing triggers potential capital gains, it also allows the cost basis of those specific funds to be rebased as part of the investment strategy.

Therefore, although tax may have become payable in the year of the rebalancing, in the future any divestitures for income or rebalancing transfers will be made from this higher cost base.

In practice, this means that potentially your earnings over time and subsequent tax can be spread over multiple tax years using the annual exclusion which, given the personal circumstances of the individual, could even result in a lower net tax payable than if the capital gain were applied. in a single year.

If you have concerns about future capital gains tax due to rebalancing, you may want to consider a fund-of-funds approach in which multiple underlying funds are used, but envelope within the same fund and the same portfolio of units.

Here, conversions and rebalances within the fund of funds would not trigger a capital gain event until you issue a withdrawal instruction to the fund of funds to either switch to another portfolio outside of the fund funds or be paid in cash.