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Tax treatment of Interest and Dividends

Interest and dividends may be paid out or re-invested in the unit trust fund. Dividends and interest held in an investment account on a platform, such as Glacier, are re-invested and as a result, increase the number of units held by the investor. The taxability of these income payments is, 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 investor’s 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 intermediaries such as Glacier and does not form part of the investor’s personal tax return.

Tax treatment of Capital Growth

Capital growth (gains), on the other hand, is taxed very differently to income earned by an investor. Capital growth (gains) 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 (gains) 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 This means whenever units/shares are sold, either to be re-invested or withdrawn, a capital gains event will be triggered.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.

Example 1

Below is the unrealised CGT statement available via Glacier. (Either on the website or from the Client contact center)

Investment fundNumber of units heldMarket value (R/c)Base value (R/c)Unrealised gain/loss (R/c)
Truffle Flexible - C54 891.26113 251.64101 228.9612 022.68
Foord Flexible FOF - B25 769.68146 902.97101 171.4945 731.48
Coronation Optimum Growth - B41 773.73145 072.66124 473.6020 599.06
Rezoo Value Trend - C7 917.58109 527.84102 135.627 392.22
PSG Flexible - E23 921.39112 607.55100 978.4011 629.15
Total  627 362.66 529 988.07 97 374.59

In this example the unrealised CGT is R97 374.59. This amount is indicative of the CGT that would be realised should the client withdraw/switch part or his/her entire investment. If only a portion of the investment is realised then the CGT will realise on that particular portion. (For example if only one fund is sold or switched – please see Example 2)

(A 41% marginal tax rate is used in the below examples)
R97 374.59 – R30 000 = R67 374.59
A third (33.3%) of the gain will be included when calculating the tax:
R67 374.59 x 33.33% = R22 455.95
This amount will then be taxed at the client’s marginal tax rate. (Assumption in this example is 41%)
R22 455.95 x 41%
= R9206.94 (potential tax to be paid)

Example 2

If we assume for example that we want to switch or realise 50% of both the Coronation Optimum Growth and Foord Flexible funds in the above portfolio, the capital gain will realise proportionally.

Coronation Optimum Growth: 50% x R20 599.06 = R10 299.53 (Capital gain realised)
Foord Flexible: 50% x R45 731.48 = R22 865.74 (Capital gain realised)
Total gain realised = R33 165.27
Capital gain minus CGT exemption = R33 165.27 – R30 000 = R3 165.27
R 3 165.27 x 33.33% = R1 054.98
R1 054.98 x 41% = R432.54 (potential tax liability/effective CGT payable)

Important things to note regarding Capital gains tax and your investment:

  • A Capital Gain is realised whenever units are sold in order to be re-invested or redeemed. A Capital gain will also be triggered when switching (buying & selling) unit trust funds within the same Management Company (for example switching between Coronation Optimum Growth into Coronation Balanced Plus).
  • 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 Investment-Linked Living Annuity.
  • 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 CGT 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.
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