Unit trusts hold a collection of shares and therefore receive a constant stream of dividend payments. This income in normally only paid out to investors twice a year. When a new investor buys into the fund part of his purchase is represented by accrued dividends. At his or her first distribution payment, part of the sum will represent the return of capital equal to the accrued dividends. This amount is regarded as capital, not income, and is called an equalisation payment. Easy.
The amount of distribution from a Collective Investment Scheme that represents the return of initial capital to new investors.
This is an adjustment which may be made if you have recently bought units in a unit trust. The first distribution you receive may be split into two parts, a dividend distribution of the income earned by your units since the date of your purchase, and an equalisation payment equal the income earned by the units before them. The equalisation payment is not part of your taxable income, but it should be deducted from the base cost of the units for capital gains tax purposes. You may also receive an equalisation payment if you have acquired units in an open ended investment company (OEIC).