Page 50 - Profile's Unit Trusts & Collective Investments - September 2025

Chapter 2 Basic concepts

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 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.
Professional management
Not many investors in SA have the time, resources and aptitude necessary to monitor their own
portfolios. Investors in collective investment schemes therefore entrust this task to professional
fund managers employed by management companies, who generally charge between 0.4% and
1.15% of the assets under management, per annum, for their management services. Annual fees
tend to be less for income, bond and index funds, and relatively more for equity-based funds.
Multi manager funds tend to be the most expensive. Some CISs charge performance-based
fees – the fees levied are dependent on the performance of the fund relative to specified benchmarks.

Competitive cost structures
Compared to most investment products, unit trusts and other collective investment schemes
have very competitive fee structures, and when it comes to cost rankings, unit trusts usually beat all
other products.
Having said this, when it comes to fees, deregulation has created a complex environment where
costs vary depending on the amount and the investment channel. Investors and advisers have to
pay attention to ensure they understand all the cost implications of different alternatives.
Fees are quoted under a variety of names, such as initial fees, annual management fees, and
adviser fees (commissions). These are explained more fully in Chapter 3. The ongoing fees of
collective investments (see effective annual costs) are generally lower than those of retirement
products, insurance-linked investment policies and structured products. Transparency and
competition in the collective investments industry have had enormous benefits for investors.
The lowest cost funds in SA have total investment costs (ie, total charged to investors) of under
0.1% per annum, a 10th of what they were two decades ago.
There are various ways of investing in collective investment schemes, each with different pros and
cons, each with different associated costs. Competition has steadily reduced costs for investors.
In recent years, for example, most management companies have reduced initial charges to zero
for direct investments made online and financial advisers are also typically not charging advice
fees upfront, but rather on an ongoing basis. LISPs (investment platforms) represent an alternative
channel where investors can often elect whether to pay broker commission for advice as an initial

48 Profile’s Unit Trusts & Collective Investments September 2025