Page 49 - Profile's Unit Trusts & Collective Investments - March 2025

Basic Concepts

The managers and their agents must disclose:
All the charges that may be levied by the manager, the method of calculation, and the amount (as
a percent or value) of the charges.
When the charges will be levied.
Exactly how the manager will repurchase participatory interests.
Particulars of the historical yield, calculated as prescribed by the deed, for the last 12 months, and
a statement of any facts that may influence future yields.
Details of any profits that were distributed during the previous financial year, expressed as a
percentage of the aggregate market value of all assets held on behalf of investors in that portfolio.
More recently, the FSCA issued a Conduct Standard under the Financial Sector Regulation Act
that sets out principles and rules on how CIS managers and fund administrators should value
assets and price units or participatory interests in portfolios registered under CISCA.
The Conduct Standard requires CIS managers to develop policies and procedures governing the
way in which they value portfolio assets. These policies and procedures must be consistent with
generally accepted accounting standards or accounting practices as determined by the FSCA.
The standard holds CIS manager responsible for ensuring the calculation of the NAV is
accurate, fair, consistent, transparent and free of conflicts. Any materical errors must be reported
to the FSCA within five days of these being detected and within 20 business days the FSCA must
be informed about the correction of the error.
Affordability
Investors can choose to invest in unit trust funds in two ways, monthly by debit order or with a
lump sum. A dozen funds allow minimum lump sum contributions of R500, but most funds
stipulate minimums of R1 000 or more. In the case of monthly debit orders, a handful of managers
allow minimum contributions of R100 per month, but the majority (about two-thirds of retail
funds) are in the R200 to R500 per month range.
Minimum lump sums for retail hedge funds start at R50 000. For qualified investor hedge
funds, minimum investments amounts are R1m.
Tax Effectiveness
Capital gains in equity-based unit trusts were not taxed until October 2001. In March 2000, the
then Finance Minister announced his intention to tax capital gains on a wide range of assets,
including equity and property-based investments.
After much lobbying from the unit trust industry, the tax authorities agreed that income and
profits on collective investments must be taxed in the hands of the individual investor, not the CIS
itself. This is in contrast to the decision to leave investment trusts liable for CGT whenever
changes were made to these portfolios. This lead to the demise of these investment vehicles.
Unit trusts remain tax efficient relative to direct investment in the share market, property, or
other asset classes. Under SA’s CGT legislation, each individual taxpayer enjoys an annual
exemption from capital gains up to R40 000. After this, taxpayers are taxed on 40% of the realised
capital gain at his or her marginal rate of tax. This means that, if the realised gain, after the
exemption, is R100, R40 must be added to income for the year of assessment. At a marginal rate of
45%, the investor effectively pays 18% CGT on taxable gains (45% of the 40% of the capital gain
added to income). Obviously the effective rate is less than 18% if the marginal tax rate of the
individual is less than 45% (eg, where a medium-income individual pays a marginal tax rate of
31%, the effective CGT rate is 12.4%).
Income from interest-bearing funds, as well as the interest portion of distributions from equity
funds, are fully taxable in the hands of investors subject to the ruling interest exemption to natural
persons. The dividend portion of distributions is subject to dividends withholding tax (DWT)
unless the investor is an exempt entity (DWT is deducted by the fund manager before the dividend
is paid out or reinvested). Unit trust management companies provide statements to investors after
February each year to show the split of dividends and interest received for tax purposes.

Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts 47