When investing in a unit trust or share portfolio there are generally two types of returns an investor can expect to earn, i.e. income and capital growth. Income earned can be received in the form of Interest & Dividends from Unit Trust funds or shares.
Tax treatment of Interest & Dividends
Interest and Dividends may be paid out or reinvested in the unit trust fund. Dividends and interest held in an investment account on a platform, such as Glacier, Allan Gray, etc, are reinvested and as a result, increase the number of units held by the investor. The taxability of these income payments are however treated differently. Interest earned is included in an investor’s gross income for a particular tax year after which income tax is deducted. Dividends however do not get included in an investors gross income, instead dividends are subject to a withholding tax. Dividend withholding tax (DWT) is levied at 15% on the dividends earned by an investor. DWT is a tax levied by regulated by the company which holds the investment and does not form part of your personal tax return.
Tax treatment of Capital Growth
Capital Growth (gain) on the other hand is taxed very differently to income earned by an investor. Capital Growth (gain) is typically defined as the movement in price of an asset over a particular period of time (also referred to as market movement). As the price of an asset increases so does the capital appreciation of the asset which in this case may be a unit trust fund or a share for example. Capital Gains Tax (CGT) is levied on the capital growth (gain) which an investor has earned when he disposes of the asset. This means whenever units/shares are sold either to be re-invested or withdrawn a capital gains event will be triggered. Natural persons and some special trusts are eligible for a CGT exemption of R30 000 per year which reduces the impact of the potential tax payable by the investor. Any gain over R30 000 will therefore be used to calculate the investor’s tax liability upon disposal. Thereafter a third (33.3% of the capital gain) will be included in the client’s gross income and taxed at his/her marginal rate.
Important things to note regarding Capital Gains Tax and your investment:
- A Capital Gain is not realised when switching between different fund classes.
- A Capital Gain is not realised when transferring units of the same fund and class to another platform.
- A Capital Gains event is triggered when an investment is transferred between different entities (natural person and trust for an example).
- Capital Gains Tax is not applicable to retirement funds such as a Retirement Annuity, Preservation fund or ILLA.
- Capital gains are realised upon death. The CGT exemption upon death increases to R300 000.
- A Capital Gain does not realise when an investment is transferred to a spouse. The CG will roll-over to your spouse at the same base cost.
- A Capital Gains tax event is triggered when an investor transfers an existing investment into an Endowment/Sinking Fund.
Please click here to view the “Glacier – capital gains tax unpacked” document for capital gains tax examples and calculations on page 2.