Warning on dividend income funds
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