Warn­ing on div­i­dend in­come funds

Weekend Argus (Saturday Edition) - - GOODHANGOUTS -

The Fi­nan­cial Ser­vices Board (FSB) has given no­tice to the pur­vey­ors of div­i­dend in­come unit trust funds that use opaque struc­tures to con­vert tax­able in­ter­est in­come into tax-free div­i­dends that the funds may be closed. This is be­cause of fears about undis­closed risk and tax is­sues.

How­ever, the FSB has con­di­tion­ally lifted a ban it had placed on new div­i­dend in­come funds.

The un­der­ly­ing in­vest­ments of div­i­dend in­come funds are pref­er­ence shares. How­ever, there are not suf­fi­cient pref­er­ence shares in is­sue to meet the de­mand. As a re­sult, some funds have used nu­mer­ous opaque struc­tures to cre­ate ar­ti­fi­cial pref­er­ence shares, ef­fec­tively con­vert­ing in­ter­est in­come into div­i­dend dis­tri­bu­tions for in­vestors.

More than R50 bil­lion is sit­ting in div­i­dend in­come funds. This has raised a con­cern with the tax au­thor­i­ties that cor­po­rates are us­ing the funds to park spare cash and avoid tax.

In De­cem­ber last year, a joint meet­ing was held be­tween rep­re­sen­ta­tives of the Na­tional Trea­sury, the South African Rev­enue Ser­vice, the FSB and the in­dus­try body, the As­so­ci­a­tion for Sav­ings & In­vest­ment South Africa.

In a cir­cu­lar to the man­agers and trustees of col­lec­tive in­vest­ment schemes fol­low­ing the meet­ing, the FSB says the ban on new div­i­dend in­come funds has been lifted, but ap­pli­cants for new funds will have to take all pos­si­ble con­se­quences into ac­count, in­clud­ing their clo­sure.

The FSB has also in­structed all the funds to warn in­vestors by Fe­bru­ary 28 of the pos­si­ble dan­gers and to pro­vide the FSB with an “exit strat­egy” for the clo­sure of a fund. – Bruce Cameron

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