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

Basic concepts Chapter 2

Dangers of unregulated investment 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, 15 years after their initial arrests, Porritt
was brought to trial. Court proceedings were still ongoing as of February 2025, with him being held in
jail due to repeated failures to appear. Since then, the case has progressed. In August 2025, the Gauteng
High Court rules that the full trial must proceed without further delays, and overseas documentary
evidence was formally admitted into the record. Despite this progress, the missing millions have never
been recovered, and it remains unlikely that investors in the shceme, many of whom lost their life
savings, will ever recover their money.

When it comes to unit trusts, the yield is open to misinterpretation. Unlike a fixed deposit account,
where the advertised rate of interest tells the investor what the bank will pay (for example) at the end
of the month, the published yield on a unit trust is a purely historical indication – it is no guarantee of
the future yield.

Capital gains tax on collective investments
Under SA’s capital gains tax (CGT) legislation, the capital gains on unit trusts are taxable in the
hands of the investor when he or she sells the investment. (The manager of the collective investment
scheme is exempt from CGT in respect of the operations of the fund, allowing the manager to buy
and sell shares within the portfolio without being liable for CGT.)
For an individual, 40% of the capital gain must be added to the taxpayer’s income. If taxed at the
current marginal rate, this leads to a maximum effective CGT rate of 18% (ie, 45% of 40%).
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.

Profile’s Unit Trusts & Collective Investments September 2025 45