According to the Association for Savings and Investment South Africa (ASISA) at the end of 2021, the total net asset value (NAV) of the South African unit trust industry was approximately R2.87 trillion (around US$197 billion). In terms of investor demographics, ASISA reported that individuals account for the largest share of South African unit trust assets at around 80%, with institutional investors (like pension funds and insurance companies) making up the other 20%. If you want in on the unit trust action and you’re considering your options before buying South African unit trusts, or you’re thinking of disinvesting from the unit trusts you already hold, here’s what you need to know about tax.
First, let’s clarify: what exactly is a unit trust?
- A unit trust is a form of collective investment that pools investors’ money into a single fund which is used by a fund manager to t invest in various assets such as stocks, bonds, and securities.
- When an investor purchases units in a South African unit trust, they own a proportion of the underlying assets held by the fund.
- The value of these units is linked to the performance of the assets in the fund. If the value of the assets increases, the value of the investor’s units also increases.
In South Africa, the Financial Sector Conduct Authority (FSCA) regulates unit trusts, by setting rules and guidelines that ensure that fund managers act in the best interests of their clients. Due to their accessibility, flexibility, and diversification benefits, South African unit trusts are a popular investment choice.
There are four main types of unit trusts in South Africa:
- Equity funds: A minimum of 80% of the collective fund is invested in shares, at any given time.
- Interest-bearing funds: These funds are concerned solely with investing in interest-earning instruments such as bonds and fixed deposits.
- Real estate funds: These funds invest a minimum of 80% of the fund in the property sector of stock markets, or the equivalent thereof. Such funds bring in at least 75% income from rentals.
- Multi-asset funds: These funds invest in multiple asset classes, enabling you to gain exposure to various assets like shares, bonds, cash, and listed property, all through a single fund.
Considering the tax implications before you pick unit trusts
The tax you’ll need to pay on your South African unit trust investment influences the net income you’ll receive. As such, you need to be aware of the tax implications of investing and disinvesting.
When you invest: how your contributions affect your tax bill
Contributions to a unit trust fund are not tax-deductible. In other words, there is no tax relief that can be sought for investing in a unit trust fund.
When you disinvest: tax on unit trusts
When you sell an asset, whether by switching between funds or disinvesting, you’re required to pay Capital Gains Tax (CGT) on the profit you made from the sale of the unit trust. This is calculated as the difference between the selling price and the cost you incurred to acquire the asset. You must report such a gain to the South African Revenue Service (SARS), and the CGT will be charged at your marginal tax rate.
The CGT is calculated as a fixed percentage of all the profits you earned from selling assets during a single financial year, which is currently set at 40%. Therefore, if you sold South African unit trust assets and made a profit during a financial year, you’ll have to pay CGT on 40% of the profit, which is added to your other taxable income and then taxed at your applicable tax rate.
There are certain exclusions to paying CGT on unit trusts:
Capital Gains Tax (CGT) is not applicable to South African unit trusts in certain situations. These include transferring units between a personal account with a management company and a Linked Investment Service Provider (LISP), as well as donating units to your spouse. Additionally,you can benefit from the annual CGT tax rebate of R40 000, which means you won’t have to pay CGT on that amount.
Furthermore, you can avoid tax entirely on the interest, dividends and capital gains you make from a collective investment scheme by investing in a tax free unit trust fund or through a tax-free savings account or retirement fund. However, these investments have specific limitations and rules that you will need to be aware of.
The tax you’re required to pay on your collective investment scheme depends on the investment product you choose. If you invest directly in a unit trust or exchange-traded fund (ETF), the tax implications may be different from investing through other products, such as a retirement fund or a tax-free savings account (TFSA).
When you invest in a unit trust fund as an underlying investment or through a tax-free savings account (TFSA), you’re not required to pay any tax on the interest, income, or capital gains you earn. However, there are certain limits to consider. In a TFSA, you’re only allowed to invest up to R36 000 per year and up to R500 000 over your lifetime. It’s also important to note that any amount you withdraw cannot be replaced.
FinGlobal: cross-border financial specialists for South Africans abroad
Whether you’re making your money moves by investing in South African unit trusts, or you’re disinvesting so you can move your money abroad, FinGlobal is here to help. Whether you need South African tax clearance assistance or to want to make an international money transfer from South Africa, consider it handled.
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