Page 48 - Profile's Unit Trusts & Collective Investments - September 2025

Chapter 2 Basic concepts

Tax free savings accounts (TFSAs)
Tax free savings accounts (TFSAs) were introduced by way of an amendment to the
Income Tax Act of 2015, allowing up to R36 000 per annum to be invested in specially
designated accounts (up to a lifetime limit of R500 000). The annual allowance was initially
set at R30 000, but increased to R33 000 in February 2017 (for the 2018 tax year) and to R36 000 from
1 March 2020. The value of a TFSA including growth is not capped, only contributions are regulated.
TFSAs are exempt from both income tax and CGT. Regulations under the Act relating to TFSAs allow
them to invest in unit trusts and other collective investments, including ETFs. The regulations, however,
include some exceptions: TFSAs may not invest in funds with performance fees and ETPs that are not
registered collective investment schemes.
Since 1 March 2018, investors can transfer the balance of a TFSA from one service provider to another
without negatively affecting their annual or lifetime contribution limits. Contributions made on behalf
of minors count toward the child’s annual and lifetime limits. Any unused portion of the annual limit is
forfeited and cannot be carried over the 12-month tax year to ensure compliance with overall tax-free
investment allowance. Exceeding the annual or lifetime limits result in penalties.

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.
Investment safety
Collective investment schemes are highly regulated, and investors can be confident that, while
they are subject to investment risks, the regulations reduce the risk of fraud or embezzlement.
Unit trusts are a good example of this “investment safety”. For more than half a century, unit trusts
have provided small investors with a way to participate in the stock and bond markets. The founding
fathers of the unit trust industry were mindful of their primary obligation: the protection of small
investors. And their groundwork has paid off – there have been very few major scandals in the unit
trust industry in SA. This can be attributed to the legislation governing the industry.
Under the Unit Trusts Control Act, unit trusts were divided into three separate legal entities: the
fund, the trustee and the management company – a structure which proved its value in protecting
investors. The current legislation governing the collective investment schemes industry (CISCA)
builds on the foundations of the old Unit Trusts Control Act (see Chapter 5).

Performance and other reporting
One of the reasons for the early success of unit trusts was the fact that management companies
were legally obliged to release performance statistics and details of underlying investments to
the public on a quarterly basis. There is no such requirement in the pension fund or life assurance
industries, even though some life and pension companies have voluntarily released figures over the
years. CISCA has added additional levels of disclosure in reporting.

46 Profile’s Unit Trusts & Collective Investments September 2025