Sanlam Collective Investments believes that its income unit trust fund, which pays tax-free dividend income, will not be targeted by anticipated legislation that will close schemes that disguise taxable income as tax-free dividends.
In the Budget late last month, National Treasury warned that it intends to close a number of schemes offered to companies, as well as a handful of unit trusts open to individual investors, that convert taxable income into tax-free dividend income.
But San-Marie Greeff, the chief executive officer at Sanlam Collective Investments, says Sanlam closed its dividend cession fund about four years ago and now runs the Alternative Income Fund. This fund invests in unlisted redeemable preference shares issued by Sanlam and the top five banks in order to raise commercial funding.
Greeff says although it will not be clear which schemes the treasury want to outlaw until there is industry consultation on draft legislation, Sanlam believes that its fund provides tax-free dividends and will be allowed to continue.
So far, there is limited detail on the plan to attack dividend income schemes, but, in the Budget Review, National Treasury cites examples of the schemes that it plans to target. These include those that involve the cession of dividends from shares to investors who do not participate in the risk of investing in the shares, schemes that offset risk through derivative positions and schemes that use preference shares to generate tax-free “dividends”, whereas these dividends in fact originate from interest-generating debt.
The Sanlam Alternative Income Fund has about R7 billion invested in it. Sanlam closed its Dividend Income Fund following earlier changes to tax legislation. Greeff says Sanlam took the view then that dividend schemes did not provide financial advisers and investors with the certainty they require.
Sanlam offers the Dividend Income Fund of Funds on its Glacier platform. This fund invests mostly in the Alternative Income Fund, with 25 percent in an income fund and an absolute return fund.