Equalisation

When a distribution is made from a unit trust, the amount distributed per unit is the same for all unit holders. However, this treatment is over-generous to holders who have only held the units for part of the distribution period. To compensate for this, many unit trusts operate a scheme of ‘equalisation payments’.

Unit trust units are bought directly from the trust itself rather than in the open market. When the units are purchased, the trust manager increases the purchase price to allow for the income accrued up to the date of payment. The increase is the equalisation amount. When the unit trust makes a distribution, it pays the same amount to all unit holders. However, unit holders who have held the units for the entire distribution period (known as Group I holders) receive a normal dividend or interest payment. Unit holders who have bought during the distribution period (known as Group II holders) receive the same amount, but it is divided into two parts.

The equalisation is the return of the equalisation amount that was paid when the units were bought. The remainder is the normal dividend or interest payment. Thus equalisation is a return of part of the purchase price. It is not income and carries no tax credit. For CGT purposes it should be deducted from the purchase price. The equalisation is shown separately from the dividend on the payment voucher and is posted as a separate entry in Trust Accounts. It usually appears with the first dividend after each acquisition.

Purchases which include an equalisation amount are made in the usual way and the equalisation is not recorded separately. However, when the first dividend is received the equalisation is posted into Trust Accounts, using movement code EQU with a CGT Override Date that allocates it back to the original purchase.

The amount can be entered as a positive amount if the Negative Addition attribute is ticked.

Further technical notes:

• Unit trusts do not calculate each holder’s accrued income up to his particular acquisition date. Instead, they average the accrued income that arises during the distribution period. So, all Group II holders receive the same rate of equalisation. This amount is roughly half the dividend amount. This equalisation rate is included with the FT Interactive Data Feed but not with the SIX Financial Information Data Feed. However, Trust Accounts does not use the equalisation rate, i.e. the Autopost does not generate the equalisation payments. Equalisation payments must be entered manually.
• No equalisation arises on a sale. Instead, the sale price includes the income accruing up to the date of sale. It may seem odd that income is in effect treated as a capital gain in this case, but the main point of equalisation is to allow the unit trust to make the same distribution to all unit holders. It is not an anti-avoidance measure.
• Most users prefer to change the CGT rule code on the EQU movement code from A1 to A4. The effect of this is that no CGT Override date needs to be entered when the equalisation is entered. Instead, the application reduces the acquisition cost proportionately of all earlier unmatched acquisitions. Technically, this is wrong if there are multiple acquisitions. However, the error is slight. In practice, the only real problem with using an A4 occurs when a holder has already sold the holding just before the first dividend is paid. In this case, an error appears on running a CGT Calculation, ‘No prior transactions for EQU to augment’. If this happens, delete the EQU entry and replace it with a negative A1 with a CGT Override Date.