How do I pay tax on my collective investment scheme?

There are three taxes that apply to your collective investment scheme.

Income tax

You are liable for income tax on any interest paid out by your collective investment scheme.

Typically interest is paid monthly, quarterly, twice a year or annually.

You will receive a tax certificate – an IT3b certificate - from your collective investment scheme detailing the interest, and you need to declare this on your annual income tax return or provisional tax return. Your return may be prepopulated with this information, but you should check it against your tax certificate(s).

You are entitled to earn a certain amount of interest each year that is exempt from tax. The annual interest exemption is currently R23 800 if you are under the age of 65 and R34 500 if you are over the age of 65.

This can only be offset against local interest income. You will pay income tax at your marginal tax rate on any interest that exceeds the annual interest exemption.

If you earn interest from an investment on a foreign market, the interest is taxed in full. You may, however, offset any tax paid in the foreign country if it is one with which South Africa has a tax treaty that ensures you do not get taxed on the same income twice.

A unit trust or ETF that is invested largely in shares with a small part in cash will typically earn a small amount of interest. Fixed income funds may earn more interest. For most investors, the tax is not likely to be significant.

If you are invested in listed property through your collective investment scheme, you may also be liable for income tax on any rental income distributed. This will also be included on a tax certificate you receive from your collective investment scheme and should be declared on your income tax or provisional tax return.

Your collective investment scheme is likely to notify the South African Revenue Service of the interest and investment income you earn, so this information may already be prepopulated on your return and you only need to check it against your tax certificates.

Dividends tax

Dividends tax at 20% also applies to any dividends that are paid to you as an investor, but the company that pays the dividends to shareholders will withhold this tax and pay it to SARS on your behalf.

You will receive a tax certificate from your fund – an IT3b certificate - indicating the dividends you received and the tax paid so you can declare this on your tax return, but you won’t be liable for any further tax.

If you receive foreign dividends from shares on foreign exchanges or shares listed on both foreign and local exchanges (dual-listed), these are also taxable at 20%.

Your fund will withhold tax on dual-listed shares but not on other foreign shares.

You may also pay taxes on foreign dividends in a foreign country. This will be shown on your tax certificate and you can declare this on your tax return. If South Africa has a tax-treaty with that country, the foreign taxes will be offset against any local taxes due.

Capital gains tax

You are also liable for capital gains tax on gains made on your investment but only when you sell your units in a unit trust or hedge fund or your ETF shares.

You are not liable for capital gains tax every time your fund manager sells shares or bonds or any other security in your fund.

You will, however, potentially realise a capital gain or loss if you:

• Withdraw money from the fund – including regular withdrawals;
• Switch between funds;
• Emigrate. 

Remember that you are entitled to a capital gains tax exemption of R40 000 every year, and in the tax year that you die, your estate will be entitled to an exemption of R300 000 in the tax year in which you die.

Your collective investment scheme will calculate the gain you have made on your investment by subtracting what you invested (the base cost) from the amount you realised when you sold the investment, emigrated or died (the market value).

It will issue you with a tax certificate – an IT3c certificate – showing the capital gain or loss.

Although the Income Tax Act provides for different ways to calculate the base cost, the collective investment scheme industry tends to use the weighted average unit cost. This is calculated using a simple average of the different acquisition costs and dividing it by the total number of units held. Read more on how it is calculated here.

You can use another method to calculate the base cost – such as specifying which units you are selling or selling the first ones bought first (first in, first out), but you need to motivate why you are using it.

The base cost can also include any initial fees you paid when you invested (but not the ongoing costs).

If you invested before capital gains tax was implemented on October 1 2001, the base cost that you must use is the market value on September 30 2001 and you can look these up here.

Your collective investment scheme will declare the capital gain or loss to SARS and you should check the amount if the information appears on your tax return.

If you made capital losses in the same year, these can be offset against any gains – for example, if you invested and sold a unit trust fund when the value was below what you invested, you will have made a capital loss. 

SARS will apply the annual CGT exemption – or deduct R40 000 from the net gain you have made (all the gains less all the losses) - and will then include 40% of the remaining gain to your taxable income to be taxed at your marginal tax rate.

The most capital gains tax you will therefore pay on the gain is at a rate of 18% if you are paying tax at the highest marginal tax rate of 45%.

If you sell offshore investments, your capital gain or loss is determined in rands. You can use either the average exchange rate for the relevant years, or the exact exchange rate on the day on which you invested and the day on which you disinvested.