More tax likely for ‘frequent’ switching of collective investments


You will not be able to switch in and out of collective investment schemes – mainly unit trust funds and exchange traded funds (ETFs) – at will without considering the tax consequences if a proposal published in the Taxation Laws Amendment Bill is adopted.

The bill, which was published this week, also:

* Proposes a date on which the changes to tax deductions for retirement fund contributions will take effect;

* Provides for the phasing out of provident funds; and

* Provides for the removal of the tax deduction for premiums paid on income protection policies.

According to a National Treasury document issued with the Taxation Laws Amendment Bill, which gives effect to the proposals announced in the Budget earlier this year, the “three-year rule” for determining tax will apply to collective investment schemes in the future.

The document also proposes that, from next year, hedge funds be brought within the ambit of the Collective Investment Schemes Control Act and be subject to the same tax regime as collective investment schemes.

The “three-year rule” means that if you cash in a unit trust or ETF within three years of investing in it, any capital gains you have made will be taxed at the more punitive marginal rate of income tax. If you disinvest after three years, the gain will be subject only to far less onerous capital gains tax (CGT).

So if you cash in a collective investment before three years since the date of purchase and you are on the top marginal rate of income tax, any capital gain will be subject to taxation at 40 percent.

After three years, any capital gain will be included with any other capital gains you have made in the tax year and will be taxed at the top effective rate of 13.3 percent, less the annual CGT exclusion of R30 000.

Any collective investments held within a tax-incentivised retirement-funding vehicle are exempt from CGT and income tax in the build-up (savings) stage. CGT does not apply in the drawdown (pension) stage, but your pension is taxed at your marginal rate of income tax when you receive the payments.

The conduit principle of taxation will continue to apply to collective investment schemes, which means that any capital gains, interest or dividends will not be taxed within the scheme, but in your hands.

Both dividends, which are subject to dividends withholding tax, and interest, which is subject to income tax after an initial exemption, are taxed in the year in which they accrue to you. In other words, you pay tax whether the payments are reinvested (added to your investment), or you withdraw the payments in the tax year in which you receive them.

Capital gains on collective investments have in the past been subjected mainly to CGT, and the “three-year rule” has not been applied strictly.

However, a new regulation is to be introduced for when a collective investment scheme makes a distribution as a payment to buy back units from a unit holder, or distributes units to a unit holder, whereupon the distribution received by the unit holder will be treated as a capital gain.

In a media statement, National Treasury says that “hedge funds are operating in an unregulated arena”.

Hedge funds will be regulated from 2014 by housing them in the legislative framework that governs collective investment schemes.

However, the “three-year rule” for collective investments will apply only to retail hedge funds, in which anyone may invest, and not to “restricted” hedge funds. In the case of “restricted” hedge funds, you will pay income tax on any capital gains, no matter how long you have been invested in a fund.


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