Page 47 - Profile's Unit Trusts & Collective Investments - March 2025

Basic Concepts

Dangers of Unregulated Schemes
Unregulated investment schemes involve more than normal investment risks – they carry
the danger of outright fraud or theft. Jack Milne’s PSC Guaranteed Growth Fund launched in
2000 is a good example. The fund guaranteed investors a return of no less than the weighted
average return of SA equity unit trusts. But the “fund” was set up as a private limited company: it was not
a registered collective investment scheme, and was subject to almost no regulation.
As a well-known investment personality, Milne’s fund quickly attracted more than R200m. The
fund published daily NAV figures which suggested the fund was easily outperforming the unit trust
industry, and within two years many investors had doubled their money – on paper, that is.
Milne aroused press suspicions when he resisted calls to disclose his portfolio. A rumour
circulated that the fund had been used to prop up the share price of Tigon, a struggling listed
company which had links with Milne and had supposedly put up the guarantee for the fund.
By 2002 investors found that cashing out of the fund was problematic, and by the end of the year
it was clear that something was seriously amiss. Sadly, the rumours proved to be true: most of the
fund’s assets had been transferred to Tigon subsidiaries. The published NAV was a complete fiction.
As part of a plea bargain with the state, Milne served a year in prison in 2005, but Tigon CEO Gary
Porritt, the alleged mastermind, evaded prosecution until 2016. In 2017, fifteen years after Milne and
Porritt were first arrested, Porritt was brought to trial. Court proceedings had still not been concluded
in February 2025, with Porritt held in jail as a result of numerous failures to appear in court. The
missing millions have never been recovered and it seems unlikely that investors in the scheme,
some of whom lost their life’s savings, will ever recover their money.

The CGT inclusion rate was increased in March 2012 (from 25% to 33.33%), and again in
March 2016 (from 33.33% to 40%). When it was first introduced the maximum CGT effective rate
for individuals (excluding the exemption amount) was 10% (ie, 40% of 25%). Note that the CGT
inclusion rate for ordinary trusts and companies is 80% (ie, 80% of the capital gain is added to
taxable income), giving an effective CGT rate of 36% for trusts (special trusts excepted) and 21.6%
for companies. For individuals, there is an exemption of R40 000 per tax year (ie, R40 000 is
deducted from the capital gain before the inclusion rate is applied).
Tax on Distributions
Distributions made by unit trust funds are taxed in the hands of investors. An investor is liable
for tax on distributions whether the distributions are physically paid out to the investor or
automatically reinvested on behalf of the investor.
Different rules apply to tax on interest and dividends. The income tax certificate issued by the
fund manager to the investor at year-end will show the respective amounts of interest and
dividends that make up the total distributions that accrued to the investor during the tax year.
Dividends from equities (whether the shares are held directly or via a unit trust) are taxed in the
hands of individual investors at a flat rate of 20%. (The fund itself does not pay tax on dividends it
receives from investments.) Tax on dividends, introduced in 2012, is a withholding tax, which means
the fund manager deducts the tax and remits it to SARS on behalf of the investor (ie, the amount
received by the investor is net of tax). Note that certain taxpayers, like unit trusts and companies, are
exempt from dividends withholding tax (DWT) and foreign investors may pay a lower rate.
Interest paid to an investor in a unit trust is taxed as part of the individual’s income.
For individuals under 65 years of age, the first R23 800 of interest received is exempt (R34 500 for
individuals over 65), thereafter interest is taxed at the individual’s marginal rate. (Note that the
fund does not pay income tax on interest received provided that any surplus interest not applied to
portfolio expenses is passed on to investors.)

Important Features of Collective Investments
Every type of investment has advantages and disadvantages, and collective investments are no
exception. CISs have many advantages as investment vehicles, and this has led to their enormous
popularity both here and overseas.

Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts 45