If you own a unit trust, more taxes are coming your way

In the recently published draft Taxation Laws Amendment Bill
(draft TLAB), Treasury appears to have taken a tough and
inflexible stance in addressing the ongoing industry debate on
the income tax treatment of disposal of assets within a
Collective Investment Scheme (CIS) – commonly known as a unit
trust.

Unfortunately, it now seems as though the individual unit
holders are likely to bear the brunt of the proposed amendment,
says Tertius Troost, senior tax consultant at Mazars, who
pointed out that currently, amounts that accrue to or are
received by a CIS which are distributed to unit holders
within 12 months follow
the ‘flow-through’ principle.

“This means that the receipts maintain their underlying nature
in the hands of the unit holders, in whose hands they are
subject to tax.”

He noted that Treasury has for some time been of the view that
an uneven playing field exists between the CIS industry and
other industries, and even within the CIS industry itself.

“This arises from the fact that the majority of CISs have
historically treated profits arising from the frequent trading
of financial instruments as capital in nature, and not on
revenue account. On this construct, a CIS is able to reinvest
its capital gains without tax consequence, or distribute the
gains to unit holders, who are effectively taxed on a capital
basis at a maximum rate of 18%.”

To address this apparent anomaly, Troost said that the draft
TLAB proposes that the disposal of financial instruments by a
CIS within 12 months
after acquisition be deemed to be income (i.e. revenue) in
nature, and not capital.

“If promulgated, this amendment will result in a CIS not being
able to retain such amounts within the fund without being
subject to tax (currently 45%), and it also will not be able to
distribute these amounts to unit holders as capital gains.

“Instead, unit holders will be subject to income
tax on such income (at a far higher effective rate
than capital gains), which can range from 0% to 45% depending
on the unit holder’s overall taxable income.”

He added that Treasury has proposed applying the
first-in-first-out method with regards to the identification of
identical financial instruments being disposed of by a CIS.

“To facilitate this proposed amendment, CIS systems would need
to be able to identify which individual instruments were
purchased and on which date, to track transactions within the
proposed 12-month period. On disposal, the system would need to
be able to use this information to distinguish between capital
gains and income gains.

“This will undoubtedly lead to a significant additional
administrative burden on CISs and their management companies,
and will require major system upgrades. Higher administrative
costs inevitably lead to higher administration fees being
charged by the CISs, which will further directly impact unit
holders.”

Various media reports have stated that less than 5% of South
Africans are able to maintain their current standard of living
upon retirement.

“For this reason, it is concerning that Treasury is proposing
tax amendments to a popular South African retirement savings
vehicle, with a direct impact on the individual unit holders.
This could have a negative effect on the already struggling
savings culture. Treasury can rest assured that industry
players will be very vocal about these proposed amendments,”
said Troost.

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