Page 46 - Profile's Unit Trusts & Collective Investments - September 2025

Chapter 2 Basic concepts

What is capital gains tax (CGT)?
A capital gain is, literally, an increase in the value of capital due to higher market prices.
Some assets produce both income and capital growth (like shares, which go up in price
and pay dividends); others only one or the other (like Krugerrands, which do not generate
income but may provide capital growth if the gold price goes up; and fixed deposits, which do not offer
capital growth, but generate income in the form of interest).
Up until 2001, fortuitous capital gains were not subject to tax (if the asset was held as an investment),
but this changed from October 2001 with the introduction of CGT. However, capital gains have always
been subject to tax when the taxpayer trades in the asset. So the capital gain on a Persian carpet was not
taxable as income in the hands of an investor who simply had the carpet in his home for many years; but
a dealer in Persian carpets had to pay tax on his profits (as income).
This distinction remains in place notwithstanding the introduction of CGT, and determines whether
capital gains are treated as income or are subject to CGT rules.
However, special provision is made for shares. From October 2007 (by the introduction of Section 9c of
the Income Tax Act), JSE listed equity shares held for more than three years are deemed to be held as
capital and are subject to CGT rather than income tax. This is now an automatic treatment, and neither
the taxpayer nor the South African Revenue Service (SARS) can choose to treat equities held for more
than three years as income. This does not mean that equities held for less than three years cannot be
treated as capital items – the test in this case remains the intention of the investor (whether the intention
was to trade or own). These rules also apply to collective investment schemes that invest in equities.
Other assets, like cash, only earn income. If you deposit R1 000 in a savings account, the “capital”
(the R1 000) is fixed, and you earn interest. But if you buy a flat and rent it out, you earn income
(rental), and at the same time the value of the property may rise (a capital gain).
When it comes to unit trusts, capital growth refers to an increase in the price of units which occurs
as the values of underlying investments rise. (Of course, these can also go down, which could lead
to capital losses.)
The income from unit trusts comes from two main sources: dividends and interest. Dividends
are paid by shares, and interest is earned on the cash held in the portfolio. (Although some fund
managers aim to be fully invested, the daily creation and redemption of units within a unit trust
means the fund must always have some cash on hand.)
Distributions
Investors in unit trusts can usually elect to either have the income paid to them on a periodic
basis (quarterly or semi-annually), or to have the income automatically reinvested. Not all
collective investment schemes offer these choices. Property unit trusts, for example, usually do
not offer automatic reinvestment, and some funds absorb income into the portfolio and do not offer
distribution of income to unitholders.
When income is automatically reinvested, the management company applies the distribution due
to a unitholder to the purchase of more units. A capital gain, in other words, means an increase in
the unit price, while the reinvestment of distributions means more units in the investor’s account.

Yield
The yield of a unit trust is a measure of the income distribution paid to investors by a fund as a
percentage of the unit price. For most funds, the yield is calculated by adding up the distributions
per unit over the preceding 12 month period and expressing this number as a percentage of the
unit price at the end of the period. (Note that a different method is used to calculate money market
fund yields – see fact sheet tips on page 190). So if an equity unit trust which declares income
semi-annually has paid two distributions, one of 5.48c per unit and the other 5.68c per unit, in
the last 12 months, and the current unit price is 223.25c per unit, the current yield would be 5%
(5.48 + 5.68 = 11.16 / 223.20 x 100 = 5%).

44 Profile’s Unit Trusts & Collective Investments September 2025