When you invest in a unit trust fund or share portfolio, there are generally two types of returns you can expect to earn: income and capital growth.
Income can be received in the form of interest and/or dividends. These two forms of income are treated differently for tax purposes. Interest is included in your gross income for a particular tax year and taxed accordingly. Dividends are not included in your gross income; instead, they are subject to a withholding tax. Dividends withholding tax is levied at 15 percent by regulated intermediaries and does not form part of your personal tax return.
Capital growth is taxed very differently to income. It is defined as a movement in the price of an asset over a particular period of time. As the price of an asset increases, so does the capital appreciation of the asset – in this case, a unit trust fund or share. Capital gains tax (CGT) is levied on the capital growth (gain) an investor earns when he or she disposes of an asset. This means that when units or shares are sold, whether you plan to re-invest the profit or withdraw it, a capital gains event is triggered.
Natural persons and some special trusts are eligible for a CGT exemption of R30 000 a year, which reduces the amount of tax payable. Any gain over R30 000 is used to calculate your tax liability. One-third (33.3 percent) of that gain is included in your gross income and taxed at your marginal rate.
The table (link at the end of this article) is a hypothetical CGT statement. The potential CGT liability is R97 374.59 – in other words, that is the amount on which you would have to pay tax if you were to withdraw from the entire investment or switch all five funds. Assuming a marginal tax rate of 41 percent, the CGT calculation would be as follows:
* R97 374.59 – R30 000 = R67 374.59
* One-third (33.3 percent) of the gain will be included in your gross income: R67 374.59 x 33.33 percent = R22 455.95.
* This amount will then be taxed at your marginal tax rate: R22 455.95 x 41 percent = R9 206.94 (the CGT to be paid).
If you sold or switched a portion of the investment, CGT would be payable on that portion.
In the following example, which also assumes a marginal tax rate of 41 percent, you sell or switch 50 percent of both the Coronation Optimum Growth Fund and the Foord Flexible Fund.
* Coronation Optimum Growth Fund: 50 percent x R20 599.06 = R10 299.53 (capital gain)
* Foord Flexible Fund: 50 percent x R45 731.48 = R22 865.74 (capital gain)
* Total capital gain = R33 165.27
* Subtract the CGT exemption from the capital gain: R33 165.27 – R30 000 = R3 165.27
* R3 165.27 x 33.33 percent = R1 054.98
* R1 054.98 x 41 percent = R432.54 (CGT to be paid)
Here are some key points about CGT and your investments:
* There is no capital gain when you switch between different classes of the same fund.
* There is no capital gain when you transfer units of the same fund and class to another investment platform.
* A capital gains event is triggered when an investment is transferred between different entities (a natural person and a trust, for example).
* CGT does not apply to retirement funds, such as a retirement annuity fund, a preservation fund or an investment-linked living annuity.
* CGT does apply to your estate when you die, but the exemption increases to R300 000.
* There is no CGT on investments transferred to a spouse. The CGT will roll over to your spouse at the same base cost.
* CGT does apply when you transfer an existing investment into an endowment/sinking fund.
* Ryno Oosthuizen is the business development manager at Glacier by Sanlam.