More tax likely for ‘fre­quent’ switch­ing of col­lec­tive in­vest­ments

Weekend Argus (Saturday Edition) - - GOODPOSTER - BRUCE CAMERON

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 (turn to page 3 for more de­tails about th­ese pro­pos­als and pro­vi­sions).

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 re­tire­ment­fund­ing 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.

CON­DUIT PRIN­CI­PLE

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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