Authorised investment funds (AIFs): structure, arrangement and tax status of funds: equalisation
Equalisation is a mechanism that features in many authorised investment funds. Its purpose is to ensure that the value of existing ‘units’ (including shares in an open-ended investment company) is not affected by the issue of further units or the redemption of existing units.
Issue of new units (or re-sale of existing units) by fund manager
To achieve this, and the result that the same distribution is paid in respect of every unit, the creation price of new units or the purchase price of re-issued units (‘offer price’) may include an amount of income that has accrued up to the date of purchase. This accrued income element in the price is called ‘equalisation’.
Units that are purchased or held at the beginning of a distribution period and held throughout that distribution period are referred to as Group I units. This type of unit will be entitled to a full share of the income that has accrued in the distribution period.
Units which are purchased part way through a distribution period are referred to as Group II units and are only entitled to a share of the income that has accrued in the distribution period from the date of purchase. It follows that ‘equalisation’ is paid only on Group II units.
The equalisation element in the ‘offer price’ is passed from the manager to the trustee to be retained in the distribution account and is distributed to Group II unit holders at the end of the distribution period.
Redemption of units (sale by participant to fund manager)
When units are redeemed, the realisation price (the ‘bid price’) will reflect the income accrued up to the date of redemption.