You, Collective Investment Portfolios and Capital Gains Tax

Overview

Compared to other investment vehicles, collective investment portfolios are a great deal in terms of Capital Gains Tax (CGT), which became from effective 1 October 2001:

  1. Collective investment portfolios are exempt from paying CGT and collective investment portfolio investors will only incur CGT when they sell their units in a collective investment portfolio.
  2. Collective investment portfolio investors will only bear a CGT cost once - when they sell their units. When a portfolio manager restructures a collective investment portfolio portfolio, that is sells an underlying share or bond in adherence to its mandate, CGT will not be incurred. Certain other investment products, in comparison, will not be as tax effective. They will sustain a CGT cost every time a transaction in the portfolio is realized, which could be many times over the lifetime of a product. In the US, for example, where in contrast, collective investment portfolios do pay CGT within the collective investment portfolio, extra costs to investors were more than 0,5% in 1999.
  3. Having CGT paid outside of the collective investment portfolio means that collective investment portfolio portfolio managers can focus on their core business of managing an investment portfolio according to a mandate, rather than being distracted by tax issues. This could result in more focused and better investment performance.
  4. The CGT rate applicable is dependent on the investor's marginal tax rate.
  5. Collective investment portfolio investors are empowered to decide when to become liable for CGT, allowing them to defer tax and to plan their investments appropriately. Relief measures such as the R16 000 exemption and the offsetting of losses against gains, can also be used.
  6. CGT policy for collective investment portfolios is transparent. Collective investment portfolio investors will know when CGT is incurred.

In conclusion, CGT policy is in line with the objective of a collective investment portfolio as a medium- to long- term savings and investment vehicle and should encourage collective investment portfolio investors to treat them as such. You could, for example, not pay CGT for as long as 20 years, if you hold onto your investment. Collective investment portfolio investors should, however, not become obsessed with not paying CGT, thereby losing sight of their overall investment objectives.

All local and foreign collective investment portfolios will be subject to CGT, except for money market funds, which have a fixed price and which generate income rather than capital gains or losses.

Understanding The Basics

On 1 October 2001, Capital Gains Tax (CGT) was implemented in South Africa. Up until this date capital gains have not been taxable in South Africa, only income as defined in the Income Tax Act, 1962.

To give effect to the proposals relating to CGT, an Eighth Schedule has been added to the Income Tax Act, which determines what constitutes a taxable capital gain or assessed capital loss. A new section 26A of the Act provides for the inclusion of a taxable capital gain in taxable income. Gains or losses are therefore not treated in terms of a separate taxation mechanism, but included in the existing income tax mechanism as set out in the Eighth Schedule.

Gains or benefits you may receive, by definition, are either capital or income. Whereas prior to 1 October 2001, if the amount was not income, the gain was tax free, it is now either included in your income or excluded by exemption in the Eighth Schedule. Understanding the treatment of various types of capital gains that you may enjoy in your lifetime is therefore important. This brochure sets out the treatment of one such asset, your collective investment portfolios.

CGT as it Applies to Collective investment portfolios

The Association of Collective Investments, in its representations to SARS when CGT legislation was being drafted, strongly motivated that collective investment portfolio portfolios should be exempt from CGT. Unlike other share portfolios, CGT is not triggered when the portfolio manager sells shares within the portfolio. Collective investment portfolio portfolio managers are therefore enabled to manage the portfolio according to their mandate, without having to concern themselves with CGT.

However, upon deciding to sell your investment in a collective investment portfolio, CGT will be triggered. Thus the investor is empowered to decide when to become liable for the payment of CGT, with the benefit of deferring the tax and planning appropriately. Furthermore, there are other relief measures that can be utilized by the unit holder - these are explained below.

Events That DO NOT Trigger a CGT Event

Where a unit holder transfers units from a personal account with a management company to a bulk account of a Linked Investment Service Provider (LISP) or vice versa, or where a unit holder donates units to a spouse, no CGT event is triggered. The original base cost has to be transferred to the new account. To facilitate this management companies will issue valuation certificates to enable the base cost to be carried forward.