By Ryno Oosthuizen, Business Development Manager at Glacier by Sanlam
When investing in a unit trust or share portfolio there are generally two types of returns an investor can expect to earn: income and capital growth. Income earned can be received in the form of interest and dividends from unit trust funds or shares.
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% (*Update: this increased to 20% on 1 March 2017) 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 This means whenever units/shares are sold, either to be re-invested or withdrawn, a capital gains event will be triggered.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 (*Update: this increased to R40 000 per year on 1 March 2016) 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, 33.3% of the capital gain (*Update: this increased to 40% per year on 1 March 2016) will be included in the client’s gross income and taxed at his/her marginal rate.
Below is an example of an unrealised CGT statement available via Glacier (either on the website or from the client contact centre). We will use these values to show how capital gains tax (CGT) is calculated, in two different examples.
In this example, the investor chooses to switch or realise all of the units across all five different investment funds. The following calculation is done to calculate the capital gains tax that the investor would be liable for:
R97 374.59 (total gain) – R30 000 (CGT exemption) = R67 374.59
R67 374.59 x 33.33% = R22 455.95
This amount will then be taxed at the client’s marginal tax rate. Assuming a marginal tax rate of 41%:
R22 455.95 x 41% = R9 206.94 (potential tax to be paid)
In this example, the investor wants to switch or realise 50% of both the Coronation Optimum Growth and Foord Flexible funds. Here’s the calculation:
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 = R10 299.53 + R22 865.74 = R33 165.27
Total 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% (marginal tax rate) = R432.54 (potential tax to be paid)
Important things to note
- 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 tax event is triggered when an investment is transferred between different entities (natural person and trust, for 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 is not realised when an investment is transferred to a spouse. The asset will roll over to your spouse at the same base cost, and they will be liable to pay CGT once the asset is sold.
- A capital gains tax event is triggered when an investor transfers an existing investment into an endowment/sinking fund.