Tax

Unit Trusts and Tax

We’ve done a lot of talking about unit trusts to date and that’s for good reason. Unit trusts permeate so many facets of our financial lives, from saving for a rainy day, to being a great place to start investing.

In our last article, we even did a Unit Trust fact sheet 101, and showed you how to make sense of things like expense ratios and asset class mixes.

It’s important to remember that a unit trust is simply a wrapper. A unit trust itself cannot give you a return, only the asset classes within the fund will generate a return for you. It is therefore very important to buy the correct unit trust for your investing needs and not simply acquire anything that ends with…’unit trust’.

As with most things ‘investing’, your mind will soon wander to the tax consequences, as after all, it is the after-tax returns that pay the bills.

“How are unit trusts taxed”, I’ll pretend to hear you ask

Unit trusts are taxed in a way that essentially allows the returns to flow through to you, as if you owned the underlying assets directly. So if the underlying asset classes are shares, and the companies declare a dividend, your share of the dividend will be taxed as if it accrued to you directly. Same goes for a money market unit trust that would yield interest.

What this means is that you can be exposed to the specific underlying nature of the various asset classes, without your investment returns being tainted in any way by the unit trust; dividends stay dividends, interest stays interest.

Most dividends earned by investors are tax-free in their hands (but for the 20% withholding tax you’d suffer when the dividend is declared as from March 2017). If your investment strategy has a high dividend-yielding portfolio of shares, a portfolio of unit trusts can support this choice.

Similarly with interest – all natural person taxpayers in South Africa are eligible to earn an amount of interest annually that is exempt from income tax. An interest-yielding unit trust can facilitate this benefit for you.


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Selling out and paying up

When it comes time to sell a unit trust, the tax consequences are quite simple. The difference between what you sell them for vs. what you paid for them, is your gain or profit. For most of you, this will give rise to a capital gain. Unit trust management companies are pretty jacked up nowadays and will generate a report for you that tells you what your capital gain is, so that you don’t have to try and remember what you paid for every unit trust.

This gain should be reflected in your income tax return in the year of assessment in which you sold your unit trusts, and SARS will do the rest.

Tax Free Savings? Is that a thing?

Things get slightly more exciting when one considers that you can own unit trusts within South Africa’s relatively new Tax Free Savings Accounts. It is essentially a ‘tag’ that is assigned to your investment that means that you pay no tax when exiting the investment. Your ability to contribute annually to this TFSA is limited, but it does still sound intriguing.

We say ‘sounds’ intriguing as we have yet to consider them in detail, but when things quieten down a bit on your financial zero to hero journey, we’ll spend some time and let you know what we think.

We’ve written quite a few other great pieces on how tax affects your various investments and retirement outcomes – here they are:

If you have any questions on any of them, give us a shout!

The Editors.

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